Robinhood Markets, Inc. (NASDAQ:HOOD) is an American financial technology company that changed the brokerage game by pulling trading power from the hands of Wall Street institutions. Its proposition is simple: to empower anyone to trade the stock market by removing commissions costs as a hurdle.
But how does it rank as an investment itself? Is Robinhood stock a buy?
On the plus side, user numbers skyrocketed from about 500,000 in 2014 to 13 million by the end of 2020. Some of that growth stemmed from its rise to notoriety as Reddit’s WallStreetBets community and Discord investment servers to wreaked havoc on hedge funds through heavily shorted securities like GameStop Corp (NYSE:GME) and AMC Entertainment Holdings Inc (NYSE:AMC).
The hedge fund vs main street battle culminated in a series of Congressional hearings in February and March, and created a media firestorm that arguably helped the app gain even more brand recognition and users. So what’s next for this disruptive brokerage firm?
Robinhood: The Early Days
Robinhood is a Menlo Park, California-based financial services company founded by Vladimir Tenev and Baiju Bhatt in 2013. It’s a broker that is registered with the U.S. Securities and Exchange Commission and regulated by the Financial Industry Regulatory Authority (FINRA).
The company grew in popularity by offering “fee-less” trading, fractional shares, a gamified user interface and easy-to-navigate app. Over time, it expanded the investable securities available to trade to include equities, ETFs, commodities, options and cryptocurrencies.
Robinhood continued raising money to fund operations while expanding its userbase and refining features. However, rivals like Webull, M1 Finance, and Public soon popped up to create a crowded market and hinder growth potential.
In addition, servicing retail investors soon proved to be a headache that put the company in an awkward financial position.
Robinhood IPO Financials: $1 Billion Loss
Although Robinhood is growing in both revenues and users, it still reported a -$1.4 billion loss for the first quarter of the year. This was largely caused by the issues in meeting its capital requirements due to the large swathe of retail day traders on its platform.
Despite this chaos, the company did grow its user base to 18 million as its CEO and co-founder Tenev appeared on Clubhouse Drop-In Audio with Elon Musk to defend his firm, and subsequently faced Congressional heat.
Tenev’s company paid a FINRA-record-setting fine of $70 million for the way it handled the situation. This follows a $65 million civil penalty from the SEC at the end of 2020 over its misleading advertising and marketing campaigns.
While marketed to consumers as a zero-fee trading platform, it actually uses a payment-for-order-flow business model. This incentivizes Robinhood to outsource its retail trades to the highest bidder to generate more revenue, and the other half of its revenue comes from account interest and Robinhood Gold.
With Robinhood Gold, users have access to larger deposits, professional reports, and the ability to trade on margin. This caused what’s known as the “infinite money glitch” that was exploited multiple times through 2019 and caused a media flurry in each instance.
Revenue for the turbulent first quarter of 2020 clocked in at $420 million, which is a massive year-over-year jump from the $96 million total revenue from the prior year’s period. Of course, it raised $3.5 billion in debt in February that it carried with it into the July 29 initial public offering (IPO).
All the negative press understandably leads to the question of the platform’s legitimacy and ability to carry a $35 billion valuation.
Is Robinhood Stock Legit?
Despite all the problems, Robinhood is an accredited broker that is properly registered and adheres to regulations.
One positive reason why it is often the focus of media attention is because it empowers individuals to invest on their own with a sleek and simply user interface (UI).
The simplicity of the app combined with WallStreetBets Reddit group enables large crowds to exercise a deliberate groupthink as seen in the “memestonk” craze. It ushers in a new era of investing that is still forming into the 2020s and doesn’t necessarily follow underlying financial fundamentals.
On the downside, Robinhood is seen as an app that has gamified investing and opened the doors to traders who perhaps are not sufficiently knowledgeable about the risks involved. In fact, a 20-year-old customer named Alex Kearns infamously committed suicide after a Robinhood notification that his exposure had reached hundreds of thousands of dollars – which turned out to be an error.
It’s an extreme case, but it highlights the unforeseen and unknowable risks attached to investing in Robinhood.
What Is the Catch with Robinhood?
As hinted at above, Robinhood is not truly a free service; it generates half of its income from payment for order flow. This means it’s wholesaling orders for fractions of a cent and doesn’t necessarily price shop its orders to get the best deal.
It landed in hot water over the WSB short squeeze, and it can often take heat for bad trades made by its user base.
Then there are the numerous times when Robinhood servers have failed when volatile market conditions cause spikes in user demand.
Can You Get Rich Off Robinhood?
A Reddit user named Keith Gill (aka Roaring Kitty) netted an eight-figure fortune and became a multimillionaire from investing with Robinhood. However, he’s more the exception than the rule.
However, investing in Robinhood is a different story – it could have a rocky road through the remainder of the year. The company’s longevity and growth potential is still largely untested.
While it could be the future of fintech and follow firms like Revolut in expanding its product offering, you may be better off using the app to invest in something else in the short term.
Is Robinhood Stock A Buy? The Bottom Line
Robinhood democratized trading access using a simple mobile interface. It rose to widespread popularity in its first decade in business, but it wasn’t without controversy. In fact, one could argue Robinhood is the most controversial fintech app this side of cryptocurrency.
However, the growing user base can’t be ignored, and the company has survived a slew of fines and regulatory actions. Once it gets past its growing pains, the payoff may be worth the risks.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.