Can U Make Money On Robinhood

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Jul 23, 2021, 08:30am EDT |

How Does Robinhood Markets Make Money?

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BRAZIL - 2019/07/22: In this photo illustration a Robinhood Markets logo seen displayed on a ... [+] smartphone. (Photo Illustration by Rafael Henrique/SOPA Images/LightRocket via Getty Images)

SOPA Images/LightRocket via Getty Images

Robinhood Markets, the zero-commission online brokerage popular with millennials, is expected to go public next week trading under the ticker HOOD on the Nasdaq. The company will offer shares at between $38 to $42 apiece, potentially translating into a valuation of as much as $35 billion. In our dashboard Robinhood Markets Revenues: How Does HOOD Make Money? we provide an overview of Robinhood's business model and its key revenue streams. Parts of the analysis are summarized below.

Robinhood's Business Model

Robinhood is an online brokerage that offers commission-free trades of stocks, exchange-traded funds, and cryptocurrency. Although Robinhood doesn't directly charge its users for trades, it primarily makes money from market makers and frequency trading firms who pay for the order flow from its retail traders. Payments for order flow, or PFOF, accounted for roughly 75% of the company's revenue last year. Additionally, Robinhood also earns revenue from interest on securities and margins loans. The company also offers other services including the Robinhood Gold premium subscription service, which gives users access to features including professional research and margin trading.

How Have Revenues Trended?

Robinhood has seen its transaction-based revenues grow 320% from around $170 million in 2019 to about $720 million in 2020. In Q1 2021, transaction revenues grew further by about 340% year-over-year to $420 million. The revenue surge comes as more retail investors have been attracted to the stock markets given the big bull run through the Covid-19 pandemic and more recently, the meme stock trading frenzy. For perspective, the number of funded accounts on Robinhood grew from around 5.1 million at the end of 2019 to about 12.5 million in 2020 and stood at an estimated 22.5 million as of the end of June 2021. The retail trading frenzy has also meant that Robinhood is able to better monetize its users. The average revenue per user rose from $65.70 in 2019 to $108.90 in 2020 and to about $137 in Q1 2021, on an annualized basis.

Although options remain the largest driver of Robinhood's transaction revenue (47% of sales), the cryptocurrency business is the fastest-growing. In Q1 2021, crypto-related revenue soared by around 20x year-over-year to almost $88 million. Apart from the core transactions business, Robinhood's other segments have also been expanding, with net interest revenue and other revenue together rising by almost 3x in Q1 compared to last year. That said, Robinhood is actually getting more dependent on its transaction revenues, which accounted for almost 81% of sales over Q1, versus about 75% last year.

Revenue

Trefis

What Are The Risks?

While Robinhood's recent sales growth has been robust, there are near-term risks. The stock markets could be peaking, with the S&P 500 now up about 90% from the lows of March 2020. Moreover, inflation is on the rise, and the U.S. Federal Reserve is also looking at rate hikes for 2023, a year ahead of initial expectations. A sharp market correction or even sideways movement could limit interest in Robinhood's platform, which largely caters to first-time investors. Separately, Robinhood's bread-and-butter payment for order flow business model is also controversial, with critics arguing that it could effectively give retail investors a worse price on their trades. Last month, the SEC indicated that it was reviewing payment for order flow, causing some speculation that the practice, which is already illegal in countries such as the U.K., could be banned in the U.S. as well. While PFOF has more or less become a standard practice for Robinhood's rivals such as Charles Schwab and E-Trade, they are less dependent on it as a revenue stream, given their larger interest-related revenues and other services.

Think cryptocurrency could disrupt the banking industry? Looking for upside from Bitcoin adoption, without buying into the cryptocurrency itself? You can find more about our theme on Cryptocurrency Stocks

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Trefis Team

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