Business Breakdowns
· Arthur Olson
So brokerage is very profitable, $150 ARPU. If you look at somebody like Cash App, which we've invested in Block in the past, it really came out of the gate very strong. One of the core problems was that peer-to-peer money transfer is a loss leader. You don't actually make money on it. You actually lose money on it. So you're fighting the more your customer uses your product, the deeper your hole is. Brokerage doesn't have that issue. One of the really important things is setting up incentives, having a war chest to fund incentives to get customers to make the right choices. The big holy grail is getting direct deposit to have customers deposit their checks on a monthly recurring basis into your account. SoFi has actually been pretty successful. They didn't have great cards, and it's a real credit to Anthony Noto and that team for executing as well as they have. We see Robinhood in a position to be very generous with incentives. They've already done this on their IRA product, which has been growing like a weed. And they are giving a 3% match on your annual contribution, way better than anybody else in the industry. And actually going back to our original frame of Robinhood disrupting based on economics and then on product, that's the economics piece in terms of being very generous on the IRA match. But then also, I think they're the only retirement account that has ever received a design award. They did receive that award. We see the same framework coming in making them successful in banking. It brings us to this question too of the gold subscription, which is another thing that smooths out the revenue profile of the business. Gold subscribers in the most recent quarter grew about 75% year over year compared to total accounts growing 10%, which is very powerful. And we see the Amazon Prime model of packing a ton of value behind a very cheap, very affordable subscription as a means of consolidating in Amazon's case, spend, in Robinhood's case, consolidating your financial life. More assets on platform to take advantage of the benefits of gold. It's $5 a month, so we're talking about the price of a cup of coffee. You get industry-leading yield on your bank balances. So think about it like a high-yield savings account, industry-leading cash back on the credit card. So 3% across the board rewards, free market data, better margin rates.
· Arthur Olson
They just continue to add value here. And that's where I think the banking offerings are going to slot behind gold. Today, 13% of users are gold customers. Spotify, I think around 40% of their users are the paid tier. Our view is that gold gets to 50% of penetration over time. And think about that as a proxy for the savings and the banking's TAM. Again, this is over a decade-long time horizon, but these products work better together. When you've got your savings right next to your brokerage, you've also got spending out of the same account. You can track your expenses, and then particularly if you let your mind run a little bit into a couple years, and they're already demoing this, the AI functionality of having a copilot for your money. The insights that you get out of that scale exponentially the more assets and the more activity you're doing on platform. So we think all of that augurs very well for Robinhood. If you think about those revenue streams, we're talking about primarily net interest income on cash balances. So pseudo-recurring, not transactional, and then also interchange on the card, which again is pseudo-recurring. So both of those things smooth out on the margin revenue profile of the business.
· Matt Reustle
[00:00:00] S0: I didn't fully appreciate the gold subscription being that one-stop shop aspiration, particularly with the banking side of things. And it all gets back to your point earlier on having that mind share and then share of financial transactions, which as you evolve a business to get away from the cyclicality of that trading business or investment business, it makes a lot of logical sense. And it's nice that you have a high-margin trading business to fund that as an alternative to some of the others that you mentioned there on the cost side of the equation. I can come up with an idea of this being software-esque, just in the sense that you're going to have the fixed cost, but the incremental margins in theory should be impressive. But how would you capture the cost structure and anything unique about that profile?
· Arthur Olson
[00:00:00] S1: You're 100% right. This is one of the great attributes of brokerage, certainly for the scaled incumbents, which Robinhood isn't an incumbent, but they're certainly scaled, is that it's very high fixed cost, very low variable costs. So Robinhood has disclosed that their cost structure is 85% fixed, 15% variable. The industry is actually very consolidated. Three players control 80% of the market based on accounts. So you've got Fidelity, Schwab, and Robinhood. And if you looked at the assets, not accounts, but assets, even more concentrated. So it's an industry that lends itself to scale and scale advantages. And a lot of that is exactly this cost structure that we're talking about in that it costs a lot to be regulatorily compliant, in KYC, to do all of these things that you need to do. But the cost to facilitate 1 million accounts is not that much different from 10 million. To your point, in terms of what's different, it's not being expressed today, but I think the long-term steady-state margins for Robinhood are significantly higher than Fidelity or Schwab. Robinhood really was born in the cloud on AWS, and that has two principal benefits. Their competitors are mainframe-based and then have been very, very acquisitive. And there's a lot of tech debt associated with that. And even with all that tech debt, maintaining all those disparate databases, they've still got 50% margins. So we expect steady-state Robinhood margins to look more like Interactive Brokers. So Interactive Brokers is around 70, and their model is different. So we get there for different reasons, but a lot of it is efficiency on the cost side. Vlad has talked about a movement to real-time settlement on blockchain rails via tokenization. Those transactions being 1/10 the cost of traditional transactions for Robinhood. So we'll see how that pans out from a regulatory perspective. But if that's true, that probably gets us even over 70%. But this is a business that scales really attractively today. The principal benefit, they're on AWS, so it's cheaper. They also can spin up products much faster. And what we're seeing is them reinvest their structural cost advantage into top-line growth objectives today. But at some point in the future, that will become less important. We'll see margin scale.
· Arthur Olson, Matt Reustle
And just for context for our listeners, today EBITDA margins are low 50s, and incrementally, EBITDA margin over the last four quarters has been, I think, 81%. So it's really impressive. [00:00:00] S0: An impressive incremental relative to the Industrials that I used to cover. [00:00:00] S1: Exactly. And remember, we're talking about $10,000 account balances. When you think about just how much bigger from an asset perspective this business gets, it's really impressive. Obviously, revenue doesn't scale like one-to-one with assets. You do see a deterioration in the ROCA, return on client assets. So we model that moderating over time, but it's still really, really impressive revenue growth coming in at very, very high incremental margins. [00:00:00] S0: If you did your best isolation of the most important things you track from a growth perspective, what stands out?
· Arthur Olson
[00:00:00] S1: Principally, we are looking at account growth over time. So we're looking at net deposits are very important. We are also looking at a non-financial metric, product velocity and uptake of those incremental products. The one risk that we see, or just generic risks that you see with a company like Robinhood that is this dynamic and this ambitious, is a loss of focus. The way to frame this in my mind is the upside is kind of on rails. And I know that maybe that sounds crazy, but if you really look at how much customers love this company, look at how they're improving the product, it's just so clear in a year or two they're going to be so far out in front of their competitors. One thing we haven't talked about, and again it's in the early phase, but the idea of AI being a platform shift in this industry, and this is again where being born in the cloud is going to be a huge advantage. You've got a sound data strategy, you can access that data. And we believe that in the next year or two, Robinhood is going to start spinning up this financial copilot that a Schwab or Fidelity is just not going to be able to offer. So I would say looking for those kinds of products, continued progress there, particularly on the AI Cortex side, they demoed at the last product day an AI scripting and screening tools, which we think are going to be very impactful for the active investor. In general, we're looking for account growth, and then we're also looking for product velocity and a retaining of key focus.