Retreat

Robinhood faces turbulent tides as the current rate environment, macroeconomic conditions, and waning day-trading enthusiasm put its once celebrated market prowess to the test.

Robinhood, once the darling of the retail investing world, seems to be stumbling. The company, which disrupted the brokerage industry with commission-free trades and a user-friendly app, now faces its own set of daunting challenges.

So, What’s Going On?

At its zenith, Robinhood was the go-to app for retail investors looking to dip their toes into the financial markets. When the trading frenzy kicked into high gear amid pandemic lockdowns, Robinhood was on everyone's home screen.

But alas, the tides are turning. With interest rates on the rise, the imminent threat of a recession lingering like a bad smell, and the realization that day trading isn’t quite the golden ticket it was touted to be, Robinhood's trading volumes are plummeting.

In fact, just this week the firm has announced a 7% cut to its workforce. This on the heels of more than 1,000 layoffs over two rounds just last year.

Do Numbers Lie?

Robinhood’s Q1 2023 results reveal a complex narrative. Total net revenues increased 16% sequentially to $441 million. However, there's more to the story. Transaction-based revenues, comprising options, cryptocurrencies, and equities, increased 11% sequentially to $207 million. Breaking it down, options rose by 7% to $133 million, cryptocurrencies saw a decrease of 1% to $38 million, while equities enjoyed a 29% boost to $27 million.

Not all is rosy though. Robinhood incurred a net loss of $511 million, an EPS of -$0.57, compared to a net loss of $166 million or an EPS of -$0.19 in Q4 2022. This massive sequential decrease of $345 million or $0.38 per share can be partially attributed to a one-time $485 million share-based compensation expense due to the cancellation of co-founders' 2021 market-based restricted stock unit awards.

Operating expenses are a concern too, with an increase of $416 million sequentially, totaling $950 million. This spike was primarily due to the share-based compensation (SBC) expense mentioned earlier. Adjusted EBITDA, though, showed promise with a 40% sequential increase to $115 million.

It’s also worth noting that Robinhood's Net Cumulative Funded Accounts grew by 120 thousand sequentially, totaling 23.1 million. Monthly Active Users (MAU) also saw an uptick, growing by 0.4 million sequentially to 11.8 million. Assets Under Custody (AUC) increased 26% sequentially to a striking $78 billion, driven primarily by higher market valuations for growth stocks and crypto assets and continued net deposits.

One silver lining is the Average Revenue Per User (ARPU), which increased to $77 from $66 in Q4 2022. Cash and cash equivalents, however, dwindled to $5.5 billion from $6.3 billion at the end of Q4 2022.

Robinhood’s latest quarterly report tells an intriguing tale. Trading volumes have dwindled significantly compared to the bull-run heydays. With interest rates spiking, traditional saving methods are back in vogue, leaving less capital for speculative plays.

Moreover, a series of high-profile losses suffered by retail traders is like a splash of cold water to the face. The narrative of easy money is fading, replaced by the haunting echoes of "house always wins".

Now, let's talk about Robinhood's own stock price – it has been nothing short of a rollercoaster since its IPO in July 2021. Opening at $38 per share, it soared to dizzying heights of $70.34 on its debut day. But fast forward to now, and the stock is gasping for air at around $9.60 per share.

This decline is not just a case of bad luck. Several factors are at play here:

1. The broader tech stock sell-off has been indiscriminate, and Robinhood hasn’t been spared.

2. The regulators have been circling the retail trading market like hawks, and Robinhood, being a poster child of the sector, finds itself in the crosshairs.

3. Last but not least, Robinhood’s own financials have been, to put it mildly, underwhelming.

Management's Gambit - Can it Save the Day?

Robinhood's management seems to be grappling for solutions like a cat on a hot tin roof. One of the maneuvers is trying to diversify the product offerings, including venturing into crypto wallets and other financial services. But one can't help but wonder, is it a case of too little, too late?

Adding to the mix, Robinhood recently unveiled an ambitious move: 24-hour trading from Sunday evening through Friday evening. This is a stark change from the regular market hours of 9:30 AM to 4:00 PM ET that were previously the norm on the platform. The move can be seen as an attempt to regain its faltering userbase and answer the growing clamor for around-the-clock trading, particularly considering the fickle temperament of the stock market nowadays. This could also be a boon for traders in different time zones, seeking to dabble when it suits them.

But with great power comes great responsibility. The introduction of 24-hour trading brings along the specter of rash decisions. Investors, now having the freedom to trade without the constraints of time, might fall prey to impulsive trading. The possibility of magnified market volatility due to increased trading during unconventional hours is another factor not to be taken lightly.

Another intriguing tidbit - Robinhood’s CEO Vlad Tenev has been wooing the public with talks about democratizing finance. While noble, the rhetoric needs to be supported by tangible value for its user base. An app, no matter how shiny, cannot change the underlying dynamics of financial markets. The newly introduced 24-hour trading option is a testament to that, but whether it's a masterstroke or a ticking time bomb remains to be seen.

Quick Aside - Have We Seen This Before?

Robinhood's predicament is not unique. Let's jog our memories to the late 90s with day trading firms who faced a similar downfall post the dot-com bubble. The euphoria was short-lived, much like a viral TikTok dance.

Robinhood, with its gamified interface, is staring down the barrel of the same gun. If history repeats itself, and it has a penchant for doing so, Robinhood might need more than catchy slogans, interface tweaks, and extended trading hours to remain relevant.

What About The Little Guy?

One can't help but think about the retail investors who were enamored by the Robinhood phenomenon. With diminishing trading volumes, will Robinhood continue to sustain its zero-commission model? Or, will the little guy, once again, bear the brunt?

Where Do We Go From Here?

Robinhood has a brand that resonates with a generation of new investors, but it is teetering on the edge of a precipice. The company needs more than diversification, PR spins, and extended trading hours. It’s like your favorite local café, known for its divine coffee. If they suddenly serve mediocre coffee, no amount of artisanal sandwiches can save the day.

Keep an eye out for Robinhood’s strategies to counter declining trading volumes and, more importantly, how these strategies will add real value for its users. It’s not just about Robinhood’s bottom line; it’s about whether it can remain the emblem of empowerment for the retail investor in a financial landscape that is notorious for its skewed playing field.

Only time will tell if Robinhood can navigate these choppy waters or if it's destined to be just another cautionary tale in the annals of financial market history.