Robinhood Markets Inc (NASDAQ: HOOD) stock has been an absolute disaster for those who bought in at the IPO or shortly afterward. The stock’s down 85% from its peaks which really isn’t the sort of result we’d hope for from a company that runs the stock market app Robinhood. But there we are, perhaps stockholders are the rich that things are to be taken from.
The thing about Robinhood is simply that the business seems to be retreating. Which isn’t, at all, what anyone is looking for in a hot growth stock. Q4 results showed that monthly active user numbers were back down below Q1 outcomes. Assets under custody have peaked. Total revenue is falling and badly too. There’s also been that significant move into cryptotrading which given Bitcoin’s pricing doesn’t look like it’s going to be all that long-term a benefit.
So, on basic numbers Robinhood isn't just not meeting expectations of further strong growth, it’s actually going backward. No wonder a hot growth stock falls in value when this sort of thing happens.
It’s also possible to take a higher-level view, which is that there’s not really anywhere for Robinhood to go. The free app – zero trading commissions recall – is funded by payment for order flow. Which is something that’s mostly illegal outside the US. Robinhood might be said to have as much of the US market as it’s going to get, there’s nowhere else the model can work, so, done and dusted it is for the company’s prospects.
Except, not quite so much. There’s still rising interest rates to consider. For there’s a little secret about how brokerages work. Clients place vast amounts of cash into them. Margins, for example, deposits, even just cash sitting in an account awaiting use. This is, traditionally, how brokerages have made their money too. Because any profit from that money, those deposits, margins, etc, belongs to the brokerage, not the client.
But the money to be made from that depends upon short-term interest rates of course. As the case of MF Global taught us a decade back. When QE collapsed interest rates down to nothing they went looking for higher-risk opportunities to keep their income up. Then lost the money and went bust.
As interest rates rise – the Federal Reserve is assumed to be planning 4 rises this year – then the cash from having that cash will rise. Now quite how large an amount this will be, depends upon how high-interest rates go and what the exact amount is that Robinhood can earn interest off.
But all that client cash inside the Robinhood system, any interest from it belongs to Robinhood the company. Rising interest rates are therefore going to create an entirely new revenue stream for Robinhood the company. It’ll not be 2% of all assets in trust (the near $100 billion) but it will, as interest rates rise, be a substantial sum compared to the current quarterly revenue of $350 million or so.
Now, whether this is going to happen soon or not, that’s another matter, as is the amount and thus effect upon the bottom line. But it is true that rising interest rates could drastically transform prospects for Robinhood.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.