Business Breakdowns
· 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.
· Matt Reustle
[00:00:00] S0: The latter being oftentimes more difficult to track but equally important because it's a symbolic measurement of the go-forward on the account side of the equation. I actually don't know if Robinhood is a global user base or if it's mostly domestic US and what that represents for them as a business. Is that a material opportunity just from a growth perspective?
· Arthur Olson
[00:00:00] S1: It's a great point, and I probably should have mentioned that's one area that I think we are extremely conservative in modeling. So basically model effectively no contribution. So to answer your question, yes, it's all US. They technically have operations in the UK, but it's very, very small at this point. Historically, the history of brokerage would tell you that it's pretty hard to break into other countries. One, because the cost of dealing with all the local regulatory regimes. Two, by definition, all these countries are going to have fewer inhabitants than the US with smaller markets. And then three, you just see the percentage of those smaller populations that invest in stocks is way smaller. So it comes smaller TAM, potentially higher cost. I think that's why Vlad is so focused on using tokenization in these markets as a way to bring down the cost and therefore making expansion into these countries much more efficient than past brokerages that failed in that attempt. In our modeling, we're probably conservative on the account growth, but we have accounts going from 26 million to 40 million. So you're talking about an addition of only about one and a half million accounts per year. About half of that coming from share take, half of that coming from net new to the industry, and that's a 4 or 5% CAGR. So pretty slow. The majority of our growth is driven by asset growth, existing accounts, and then monetization of these peripheral financial services. But I encourage any of our listeners that want to dig into the international opportunity, please do. And this is a perfect example. Robinhood is doing so many things, you almost have to pick your bets in terms of what you think matters. Vlad, if you hear him talk, he thinks international is a huge opportunity. So I'm probably wrong on this, but it's just even more upside. I don't think you need to believe you get much contribution, if anything, for this to be a knockout.
· Matt Reustle
[00:00:00] S0: It's difficult with this type of velocity. As you mentioned, one point you just made on that 1.5 million, half coming from taking share, half coming from net new accounts. Has the share taking or share grab been a piece of the story in recent years? Do they report that? Is there any way to measure whether that is actually something that you're seeing happening?