Robin Hood‘s (NASDAQ: HOOD) The popular trading app has done a lot to democratize investing, for example by pioneering the concept of commission-free trading several years before most brokers embraced the concept. However, in this fool live Video clip, recorded on September 20Motley Fool contributors Matt Frankel, CFP and Jason Hall explain why you probably won’t find the stock in their portfolios anytime soon.
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Matt Frankel: So everyone knows Robinhood. The recent numbers look fantastic on the surface. Incomes are skyrocketing. They’ve grown their business from 9.5 million funded accounts a year ago to 22.5 million now. More than doubled year over year, just the number of users. Assets on deposit – that is, money in their accounts – has more than tripled in the past year.
Sounds good, doesn’t it? Think about it, 90% of their transaction income comes from either cryptocurrencies or options. Only about 10% of it comes from stocks. My question is: is it sustainable? 51% of income, to be precise, came from cryptocurrency trading. 34% of this comes from Dogecoin (CRYPTO: DOGE), Besides. That scares me in itself. I’m not trying to try to get off Bitcoin (CRYPTO: BTC) and stuff like that. I’m not that much of a cryptocurrency guy myself. But it has its place, not Dogecoin.
Jason Hall: It is the crypto penny stock.
Frankel: Exactly. In options, 29% of their transaction income came from options trading which, to be fair, Robinhood is one of their big advantages over their competition. It is the only one that I know of that does not charge a contract fee for options trading. Jason can probably support me on that too. If you don’t know what you are doing, there is no easier way to lose your money than trading options, maybe lottery tickets.
Room: Yes I agree. That’s because that’s the thing where you look at the numbers and it might sound like, well, it’s just little numbers here. But these are usually binary results. Either you can earn a little or you lose everything you put in the premium.
Frankel: I have to imagine that just knowing Robinhood’s customer base, no offense to Robinhood traders, tends to favor younger and less experienced investors. Many people trade options on the Robinhood platform while others should not be trading options. I think it’s fair to say it. If you are an options trader who does it the right way and knows what you are doing, you are using Robinhood, great, more power for you. But it scares me as one of their main drivers of income.
I’m going to let Jason step in, but what would make me change my mind? First, I would like to see Robinhood spend more of their income on subscription products. The Robinhood Gold platform, for example, their premium offering which has a bit of headroom, which has a few other cool features, generates a good stream of recurring revenue. They don’t have to be so dependent on cryptocurrencies and options and things like that. I would like to see them develop their subscription side of the business. I would like them to move a little more towards an investing mentality rather than a trading one.
I have the impression that they are doing their customers a bit of a disservice by adopting the trading app. I think a lot of its competitors, Cash App for example, SoFi (NASDAQ: SOFI), which we’ll talk about, do a much better job of encouraging investment and responsible investing in the stock market. They do the commission-free thing, this tech-driven app, but double the educational resources really teach people how to invest. I would love to see Robinhood do that. These two things could change my thesis a bit.
Room: I tend to agree because right off the bat, if you think about it, I think their average user is in their early 30s, which is actually not as young as you might think. But the company is clearly focused on the laser for rejuvenation. Their last thing, their marketing, the push they’re having, is they’re doing this college tour. We talked about it one day in The Five last week. Toby Bordelon and I were both of the same opinion that it was like, Matt, you remember that, your first day on campus and you walked past the student center, and what do you see?
Frankel: Credit cards.
Room: Credit card. Hey, freshman, come get a credit card. I’m trying to figure out, am I seeing things the wrong way or is it reality? Because Robinhood, let’s be honest, the more young people start to invest, the better. It’s like at the heart of what we want to do. But Matt, your points are on gamification.
The thing is, I think people don’t really necessarily understand the psychology of it. It’s like the way our brains are wired. The younger we are, the more the cabling devalues the risk and assumes an optimal result. Young people mess around when it comes to money. I think we can all remember that. This is what concerns me the most, these are exactly the things you are saying. Because if you change that and think about gross business, right now it’s about trading, it’s about taxable accounts.
If you can build strong relationships with people who are meaningful and sticky at this point in their financial life, the next 10, 20, 30, 40, 50 years you can grow, you can add Roths, roll, start make advice. All people want is to travel at the pace of their financial lives. Robinhood would grow taller with them. But I think they’re doing a terrible disservice because they’re so focused on their incentives. Like you said about the income they come from, their incentives don’t quite match the things that should boost their business in the long run.
Jason Hall owns shares of Bitcoin and SoFi Technologies, Inc. Matthew Frankel, CFP owns shares of SoFi Technologies, Inc. Motley Fool owns and recommends Bitcoin and SoFi Technologies, Inc. Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.