Business Breakdowns
· Arthur Olson
[00:00:00] S1: It's a good question and it gets to a point Vlad has talked about. He considers 2022 the refounding of Robinhood. The background is January 2021. You had the crescendo of the meme stock hysteria. Robinhood was forced by the central clearinghouse to effectively pull the buy button on those stocks because of an egregious capital call that was given in the middle of the night, demanding $3.5 billion. That was 10x any capital call Robinhood had received up until that point. They'd only raised $700 million since inception, and that's a whole story that's just fascinating. But they get through that moment in time, they raise some capital in case that happens again. They get through, but they're just dragged through the mud in the media. It's the only issue that could unify AOC and Ted Cruz—just excoriating Robinhood and these abuses and collusion. Long story short, all of that was proven not to be true. It was just complying with the regulators, the reason they had to pull the buy button. You then fast forward to 2022 and you're coming right off of that controversy into inflation ripping, interest rates going up, growth stocks melting down, investors pulling money out of those stocks, putting them into yield assets. Robinhood's volumes declined by 40, almost 50%. And it was another existential moment. Would the business have gone bankrupt? Are we topping out? Can we continue to grow through this? And Vlad's insight was that the business that he founded catered to the first-time investor. And that was a very powerful unlock, democratizing finance. But the next unlock, and what would make their business much more resilient through cycle, was focusing on the active trader. And these are more sophisticated traders, people that are using option strategies, multi-leg option strategies that can benefit in a bull market. They can also make money in a bear market. They can also make money in a sideways market, and also their transaction density is higher. That was his insight and he realized, okay, we built the product for effectively newbies and we by accident acquired some active traders just because our fee structure is so much better and the product is a little bit better. But we were really not doing a good job serving these customers. So this is what kicked off two years of intense product development.
· Arthur Olson
It kind of looks like Robinhood is working because meme stocks are working or the market is ripping, but really understanding what happened, all of the seeds were sowed two years ago. The key focus points were one, recognizing the limits of being a mobile-only experience. So realizing if we want true traders, sophisticated investors, we need to have a desktop-based platform that has rich charting. That's called Robinhood Legend. That launched last year but had been in the works since 2022. Number two, we need to improve the latency and speed across a lot of the products. We need to improve the option experience. We need to expand into other asset classes that sophisticated traders care about. So futures, tax benefits, also index options. So what you've seen is really this massive increase in product velocity. If you go back from 2015 to 2021, Robinhood was putting out one big new product a year. Over the last three years they've been putting out five big new products a year and a lot of iterative improvements on existing ones. That actually undersells it—there have been more improvements than that. Reputation and brand follow product. So Robinhood's product has improved massively. You would not be wrong, I think, in 2021 to just say, hey Robinhood, I might want to use it, but there's a whole list of things they just don't do that I need to have my brokerage do. And they have been chipping away at that list. They're almost at complete product parity with Fidelity, with Schwab, and in a lot of ways pulling ahead. So I think it's the improvement in product and we're seeing that in the reputation increasing and particularly in NPS. They were scoring really badly with their active traders. Active traders now rate them higher than any other cohort within the company. NPS has improved 40 points since 2022 and overall customer NPS has improved 30 points as well. The business really has changed. The last part of this that I would point to is that the business mix has broadened quite a bit. So if you go back to 2021, transaction revenue was almost 80% of revenue. I think it was around 75%. If you look at that today, it's about 55%. What has grown in its place?
· Arthur Olson
Obviously, transactions continue to grow, but the growth of cash sweep—so earning interest on your clients' unused cash, which is just going to continue to grow as Robinhood grows its account balances from $10,000 to $100,000 to $200,000. Also spinning up the margin lending business, getting that bigger, getting more competitive on margin rates. I think in 2021 they had three businesses that were doing nine figures. So $100 million revenue businesses. Today, that's nine. The business has diversified over time, so it should be more resilient regardless of market cycle. And then also interest rate dynamic today versus 2021. The last point I would just make is that Vlad is, I think, a fantastic CEO and is the heart and soul of that organization. He's the one that's driven the vision. He's also really smart in terms of bringing in industry talent. That was one legitimate shot you could take at Robinhood pre-2022—it's a light offering. They're moving really fast. But you're in a regulated financial industry. You're going to make mistakes. That's going to be costly. He recognized that and brought in a whole host of financial services industry veterans. I would call out just one quickly, a guy named Steve Quirk. He's a big personality. He's featured in a lot of the events. He's just a really cool guy. He architected TD Ameritrade's expansion into active trader and architected their acquisition of thinkorswim. So brought him in and said, hey, you know the playbook. Let's execute it here. And that was in 2022 as well. So the product's gotten better, the leadership team has gotten better, and the business is more diversified than it was in 2021.
· Matt Reustle
[00:00:00] S0: Best way to go after a strategy is to hire somebody that's already done it and executed on it before. I can certainly admire that if I take what you just mentioned there. I think there's a lot of public scrutiny or questioning over some of the product rollouts, whether it's options or anything that would typically have risk associated with it to the average retail client. It sounds like this is very much for the active trader base, which in theory understands the risks and dynamics of these, understands the hedging mechanisms rather than being long all these naked exposures. And that itself is offsetting potential risk associated with those going into it that aren't as aware.
· Arthur Olson
[00:00:00] S1: I think that's fair. You look at the customer outcome. So we talked about account balances roughly 5x-ing over the last three years. Let's make it a hard comp. Let's look at the peak in 2021. We're still 2x that level. And if you decompose the growth, it's really, really healthy. Half net new deposits, and then it's half organic appreciation of the assets in the account. And what that shows you is that investors are making good decisions. Again, these are not day traders that are blowing themselves up. If they were, you just wouldn't be able to get the asset growth that they're showing. And then on the other side, the really healthy net new deposits show that Robinhood is becoming a higher mindshare. It's a platform that they want to add assets to, that they want to make a bigger part of their financial life. The proof is in the pudding in terms of their customers doing well. There's a great book. Charles Schwab wrote an autobiography called Invested. It came out in 2019, and it was fascinating to me. He disrupted the industry in 1975. They deregulated commissions, and it birthed this whole industry of discount brokerage. And Schwab was the most successful. And to see the smear job and attacks that the legacy guys aimed at Schwab, it's very similar to the narratives that have been promulgated around Robinhood a couple of years ago. It was about gamification, and you need to take this almost paternalistic view of the customer can't be trusted to have choice. We need to make that choice for them. A lot of those same arguments were put against Schwab, and he talks about it a lot. And I think in a lot of cases that's covering up for either the legacy guys want to protect rent-seeking monopoly in one way or another, or it's just a lack or an inability of innovating. A lot of these legacy guys, we know, are on ancient tech stacks and have grown through acquisition. So you've just got this nightmare trying to integrate on the back end. One great example is crypto. Robinhood introduced crypto, actually being able to buy a token itself, in 2018. Fidelity was obviously slower, but in 2022 I think they launched for institutional clients and then 2023 for individual clients. Schwab still hasn't. It's coming in 2026. And you could say, well, maybe that is a paternalistic view.
· Arthur Olson, Matt Reustle
I also think there's probably something technologically on the back end that's an issue. The success points for the customers speak for themselves. In general, it is better to empower customers with choice and variety and let them make decisions. [00:00:00] S0: It's always difficult to take a legacy incumbent's arguments against a new entrant, an outsider saying it with validation. You always have to think with a bit of skepticism towards that. And we see it across industries. [00:00:00] S1: There's a perception that Robinhood is always pushing the envelope in terms of the riskiest things. It's actually not the case. And you look at crypto, so they were early to offer crypto. They only offered the 10 most liquid biggest names. If you look at Coinbase, they're offering 250. Now obviously that is their business. But Robinhood could have done the same, but purposely held back because of regulatory uncertainty. I think that's one of the risks here, is making sure that you don't put irresponsible products in front of your customers. Prediction markets is really the only one where I have even a tiny bit of a question. I think there might be a little bit of risk. [00:00:00] S0: How so? I'm very curious.