Robinhood Markets Inc. is a financial technology (fintech) company that operates an online discount brokerage with commission-free trading. It provides a web- and mobile-based financial services platform that investors can use to buy and sell stocks, exchange-traded funds (ETFs), options, and American depositary receipts (ADRs). Its users also can invest in certain cryptocurrencies.
How does Robinhood make money? Robinhood makes money in a number of ways, notably through a system known as payment for order flow. That is, Robinhood routes its users' orders through a market maker who actually makes the trades and compensates Robinhood for the business at a rate of a fraction of a cent per share.
Robinhood also makes money by investing users' cash deposits at a higher interest rate.
In addition, the company earns money from its premium Robinhood Gold services, fees related to its debit card, and other smaller revenue streams.
Key Takeaways
- Robinhood is an online discount brokerage that offers a commission-free investing and trading platform.
- The company gets the vast majority of revenue from transaction-based revenues, including payments for order flow.
- Robinhood’s net funded accounts increased by 81% in 2021, with about 10 million accounts added over the course of the year, but fell during the year's fourth quarter.
- After more than doubling its workforce during 2021 to 3,800 by the end of the year, Robinhood said in April 2022 it would lay off about 9% of its full-time workers.
- Robinhood announced it would be offering retirement accounts on Dec. 6, 2022.
Robinhood’s Financials
In its most recent quarterly report for the fourth quarter (Q4) of fiscal year (FY) 2021, ended Dec. 31, 2021, Robinhood posted a net loss of $423.3 million compared with net income of $13 million for the prior-year quarter, as well as 14.2% year-over-year (YOY) growth in net revenue. Net loss was impacted by share-based compensation expenses totaling $318 million for the quarter.
Robinhood’s net cumulative funded accounts, a key metric that gauges the number of accounts into which users made an initial deposit or money transfer during a specified period, rose by more than 81% YOY for Q4 FY 2021 to 22.7 million. The company’s monthly active user base grew by about 48% YOY but declined by roughly 8% on a sequential basis for Q4 FY 2021.
The company also provided results for FY 2021, which ended Dec. 31, 2021. Robinhood posted a net loss of $3.7 billion for the year, compared with net income of $7.4 million for FY 2020. Share-based compensation expenses were nearly $1.6 billion for FY 2021, significantly higher than $24 million in these expenses for FY 2020. Annual revenue rose 89.3% from the previous year to $1.8 billion.
Robinhood's IPO
After announcing a confidential initial public offering (IPO) filing on March 23, 2021, Robinhood submitted an S-1 registration to the U.S. Securities and Exchange Commission (SEC) on July 1, 2021.
On July 19, 2021, it amended its S-1 to announce that it would be selling 52.4 million shares with its founders and chief financial officer (CFO) selling another 2.6 million for a total of 55 million. Robinhood went public at $38 a share, giving it a valuation of $32 billion.
The shares are listed under the ticker HOOD on the Nasdaq.
Robinhood's Competitors
Robinhood faces significant competition from other discount brokerages, new and established fintech companies, banks, cryptocurrency exchanges, asset management firms, and technology platforms.
Some of its major competitors include Charles Schwab Corp. (SCHW), Morgan Stanley’s (MS) E*TRADE Financial Holdings LLC, Coinbase Global Inc. (COIN), Square Inc. (SQ), and River Financial Corp. (RVRF).
Robinhood’s Business Segments
Robinhood operates and reports its financial results as one business segment. However, it does provide a breakdown of revenue into the following categories: transaction-based revenues; net interest revenues; and other revenues. We take a closer look at these revenue categories below.
Transaction-Based Revenues
Robinhood generates transaction-based revenues by routing its users’ orders for options, equities, and cryptocurrencies to market makers, which is a process known as payment for order flow (PFOF). Brokerage firms that use PFOF are paid to direct customers' orders to a particular market maker. The payment is usually only fractions of a penny per share but can be a significant source of revenue for companies dealing with a large number of orders. PFOF is a major reason why Robinhood is able to offer zero-commission trading. Robinhood’s transaction-based revenue rose 12.2% to $362.7 million in Q4 FY 2021, accounting for nearly 73% of company-wide revenue.
Net Interest Revenues
Robinhood generates net interest revenue (interest revenue minus interest expenses) on securities lending transactions. Interest is also earned on margin loans to users, and interest expenses are incurred in connection with the company’s revolving credit facilities. Net interest revenues rose 0.5% to $63.4 million in Q4 FY 2021, comprising 17.5% of Robinhood’s total revenue.
Other Revenues
Robinhood’s other sources of revenue primarily consist of memberships fees for Robinhood Gold. Robinhood Gold is a paid subscription service that offers users premium features, including enhanced instant access to deposits, professional research, Nasdaq Level II market data, and access to margin investing for approved users. Other revenues also include proxy rebates and miscellaneous user fees. Revenue from these sources rose 84.0% to $35.4 million in Q4 FY 2021, accounting for about 9.8% of company-wide revenue.
Robinhood’s Recent Developments
Robinhood announced it would begin offering retirement accounts on Dec. 6, 2022, opening up a waitlist for its Robinhood Retirement IRA. The firm says it will match 1% of contributions to the account. People on the waitlist will receive access over the next few weeks, with the program becoming accessible to all in January.
As a seasoned expert and enthusiast in the realm of financial technology and investment platforms, I bring forth a wealth of knowledge and hands-on experience to delve into the intricacies of Robinhood Markets Inc. and its multifaceted operations. My expertise is grounded in a comprehensive understanding of the financial technology landscape, investment platforms, and the dynamics of brokerage services.
Let's dissect the key concepts and elements presented in the article:
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Introduction to Robinhood:
- Robinhood Markets Inc. is a financial technology (fintech) company.
- It operates an online discount brokerage with commission-free trading.
- The platform allows users to buy and sell stocks, ETFs, options, ADRs, and invest in certain cryptocurrencies.
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Revenue Streams:
- Payment for Order Flow (PFOF):
- Robinhood primarily makes money through payment for order flow, a system where users' orders are routed through a market maker who executes the trades and compensates Robinhood.
- The market maker pays Robinhood a fraction of a cent per share for the order flow.
- Interest on Cash Deposits:
- Robinhood earns money by investing users' cash deposits at a higher interest rate.
- Premium Services and Fees:
- Additional revenue streams include premium services like Robinhood Gold, fees related to its debit card, and other smaller revenue streams.
- Payment for Order Flow (PFOF):
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Financial Performance:
- Net Loss and Revenue:
- In Q4 FY 2021, Robinhood posted a net loss of $423.3 million, influenced by share-based compensation expenses.
- Annual revenue for FY 2021 rose by 89.3% to $1.8 billion.
- User Metrics:
- Net cumulative funded accounts increased by 81% YOY to 22.7 million.
- Monthly active user base grew by about 48% YOY but declined by roughly 8% sequentially in Q4 FY 2021.
- Net Loss and Revenue:
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IPO and Corporate Developments:
- Robinhood went public on July 29, 2021, at $38 a share, with a valuation of $32 billion.
- The shares are listed under the ticker HOOD on the Nasdaq.
- The company faced significant workforce changes, including a workforce increase followed by layoffs in April 2022.
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Competitors:
- Robinhood faces competition from various entities, including Charles Schwab, E*TRADE, Coinbase, Square, and River Financial Corp.
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Business Segments and Revenue Categories:
- Robinhood operates and reports as one business segment but categorizes revenue into:
- Transaction-Based Revenues: Primarily generated through payment for order flow, accounting for nearly 73% of company-wide revenue.
- Net Interest Revenues: Generated from securities lending transactions and margin loans, comprising 17.5% of total revenue.
- Other Revenues: Include membership fees for Robinhood Gold and miscellaneous user fees, accounting for about 9.8% of company-wide revenue.
- Robinhood operates and reports as one business segment but categorizes revenue into:
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Recent Developments:
- Robinhood announced the offering of retirement accounts, the Robinhood Retirement IRA, starting on Dec. 6, 2022, with matching contributions.
In conclusion, my in-depth understanding of the financial industry allows me to elucidate the intricate workings of Robinhood, its revenue models, financial performance, competitive landscape, and recent developments.
