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One of my earliest pieces for Net Interest, in June 2020, explored the fuzzy line between investing and gambling. The case study was Robinhood. The company, founded seven years earlier, had massively disrupted the retail brokerage industry by dropping commission rates to zero. Having removed that friction, it then borrowed insights from behavioral psychology to gamify the user experience, awarding free shares of random stocks for completing certain actions, sending push notifications to advertise “biggest mover” stocks, and displaying celebratory confetti after executing a trade. At the time of the piece, Robinhood was experiencing a breakout period: The firm added 4.7 million net new accounts over the preceding six months to take its total user base to 9.8 million. Customer activity levels spiked to 108 trades per account on an annualized basis.
A few months later, the meme-stock craze took hold and customer engagement surged further. Robinhood won another 10.0 million accounts in the first half of 2021, taking its total customer base to 22.5 million. In the first three months of that year, the average account did a staggering 132 trades on an annualized basis. By then, the company had introduced crypto trading to its offering, accounting for a growing share of activity.
When Robinhood came to the market via an IPO in July, it revealed that customers were sitting on $25 billion of aggregate gains. That’s what happens when markets go up. But after markets turned in 2022, gains began to erode. Over the course of 2022, market depreciation hollowed $54 billion out of users’ accounts. With less house money to play with, activity levels plummeted and the firm struggled to win new accounts, growing at sub-2% a year for the next two years. Fortunately, higher interest rates opened up a new revenue stream and a base level of trading activity helped to keep the lights on; revenues averaged around $400 million a quarter after exceeding $500 million in early 2021.
Now, the company is back. This week, it reported over $1 billion in revenue in its most recent quarter. Its stock is already the best performer year-to-date in the MSCI World Financials Index. Its chart looks like a smile:
As it looks forward, the company is at a crossroads. The challenge with running a gambling business is that customer churn makes it difficult to scale. The alternative is to become a broader financial services business. Robinhood is experimenting with both. To see how Robinhood navigates this fork in the forest, read on.