Robinhood's Lost Glow, and How it Can Get it Back
Updated: Mar 28
Robinhood's handling of its liquidity issue during the GameStop caused it to lose some of the appeal it had with young investors.
Robinhood's inability to grow its average revenue per user in 2021 has now turned Wall Street off from the once popular app.
Robinhood's stock currently trades for a price 60% below its IPO price.
Can the company recapture the magic and boost its stock price?
In 1985 a terrible mistake was made. During that year, Coca Cola ($KO) changed its formula and released New Coke to the public. The public hated it and the company corrected their mistake and went back to the classic formula, Coke Classic. Companies make changes and upgrades to products all of the time, but what made Coke’s mistake terrible is it changed its product to capture a new market, with little regard for the people who liked Coke as it was.
The cause for Coke’s biggest blunder was Pepsi. In the early 80s, Pepsi started to kick Coke’s ass with the Pepsi Challenge. The challenge was a blind taste test of Coke and Pepsi, with the participant deciding which cola tasted better to them. It was a Pepsi commercial, so of course, the people chose Pepsi. Some people just preferred the less carbonated, less bold version of cola that is Pepsi. Personally, I like the super carbonated bolder taste of Classic Coke, and millions of others do too. But Coke’s management team interpreted the Pepsi challenge as people no longer like the taste of Coke, and so they changed the formula. The change didn’t convince people who preferred Pepsi to buy New Coke, in addition the change angered fans who preferred the Classic Coke taste.
What I learned from the New Coke debacle was to never upset your core fans, your core audience, or your core consumers in an attempt to capture another audience or another set of consumers. Robinhood’s ($HOOD) management did not learn that lesson.
Robinhood has made some New Coke-like errors over the past two years, which has led to a decline in average revenue per user, and resulted in a stock price that sits 60% below its IPO price. Like Coca-Cola, Robinhood has spent too much time trying to please the critics and too little time trying to please its consumers.
The company’s first blunder occurred in 2020 when it stopped providing information on Robinhood accounts via its API. The second major blunder occurred in early 2021, when Robinhood restricted its customers from buying and selling GameStop for a day at the height of GameStops bull run. The company did have a valid reason for putting the restriction in place, but not being up front with its customers about the restrictions made the Robinhood faithful lose confidence in the company.
Although its stock price is down bad, I do think the company can turn it around and grow their average revenue per user, which declined 5% in 2021 from 2020. Robinhood needs to make a few changes to get its glow back, and its stock price moving in the right direction, and here are three changes they should consider.
I. Bring the Data Back
In 2020 Robinhood stopped providing data on its accounts via its application programming interface or API. Robintrack, which is not an affiliate of Robinhood, would use the data provided by Robinhood to create a dashboard of the most bought and sold stocks on Robinhood. Robinhood killed the API because of critics who accused the company of gamifying the serious business of investing and promoting a herd mentality.
Yes, there was a herd mentality to Robinhood investors, and it became noticeable in late spring of 2020. Novice investors sheltering in-place and armed with increased unemployment benefits and stimulus checks tried their hand at investing, and did pretty well. The herd mentality of Robinhood investors helped move Hertz stock price from under $1 to over $6 per share. Robinhood claims it stopped providing the information via its API because it is committed to enabling people to invest responsibly, but I think that is B.S. They did it to appease the critics.
The herd mentality of novice investors is a benefit to Robinhood. In 2020, year one of the pandemic, Robinhood’s monthly active user count jumped to 11.7 million from 4.3 million the year before. In the chart below, I don’t believe it is a coincidence that monthly active users declined in Q3 2020, around the same time they suspended their API. Looking at the same chart, monthly active users and daily active users made a big jump in Q1 2021 during GameStop and meme stock mania, which was driven by the Reddit herd. Monthly active users in Q1 2021 alone jumped 105% year-over-year. People were making money on Robinhood trading stocks, and the herd followed.
Forget the critics, Robinhood should go back to providing the data it used to provide. Information is just information. Stopping the flow of information that the users liked, but the critics disliked is the New Coke of the 2000s. Note to Robinhood, you’re not a babysitter, it’s just information, bring back the data.
II. Stop Half Assing, Go Hard on Crypto or Leave it Alone
If cryptocurrency was a beach, Robinhood has been entering the water one toe at a time since 2018. It's been four years since Robinhood entered the crypto space, the company only offers seven cryptocurrencies on their platform, and just recently rolled out a crypto wallet. I’m not suggesting that Robinhood offer the 9600 options listed on Coinmarketcap.com, but what I am suggesting is that Robinhood make it a competition with Coinbase ($COIN). Of the top 10 cryptocurrencies listed on Coinmarket.com, Robinhood only offers two, Bitcoin and Ethereum.
Robinhood’s limited crypto offering has been a good source of growth for the company. In Q1 2021 9.5 million Robinhood customers traded cryptocurrencies on the platform, up from 1.7 million the quarter before. In Q4 2021, revenue generated from crypto trading increased by 304% to $48 million. It’s clear that the customer base wants cryptocurrencies, why not go all in and give it to them?
I understand for Robinhood, the crypto space is a tricky place to navigate. Cryptocurrency is still a dirty word in some parts of the investment community, and a heavy involvement in crypto brings a type of scrutiny that Robinhood may not want. But to hell with it, take the scrutiny, let the critics criticize, give the people what they want. Since the major discount brokerages - Charles Schwab ($SCHW), Ameritrade ($SCHW) which is now owned by Charles Schwab, and E-Trade ($MS), which is now owned by Morgan Stanley - went commission free, Robinhood has no longer been the disruptor, it’s become the disrupted. Going all in on crypto would make it a disruptor within the cryptocurrency space, and keep more users on the platform, which leads into the third change Robinhood should make.
III. Offer More, Keep People on App
The company should start with stocks. Offer over-the-counter stocks, offer more ADRs, just offer more. I applaud the company for making IPOs available, and before that making options available on the platform, but it needs to do more. It should look to add more stocks to the platform as well as bonds and maybe commodities.
If you’re thinking that these investment vehicles are too complicated for new investors, remember no one is a new investor forever. Robinhood is a great platform for people to get their feet wet in the market, but it needs to also become an app that investors can grow into. For a Robinhood investor who has confidence in an OTC stock, that investor can’t buy that stock on Robinhood, they’ll have to go elsewhere. If you’re on Robinhood and you want to invest in LVMH. You can’t do that on Robinhood. Do you want to set up an IRA? You can’t do that on Robinhood either, you’ve got to go elsewhere. Robinhood in its current state begs Charles Schwab, E-Trade, and Ameritrade to take their customers that have transformed themselves into sophisticated investors. The company would better serve its users by making the app a one stop shop for investing and money management.
Not Sitting Still
Robinhood isn’t still and waiting for things to happen, although it sometimes feels like it is. Robinhood recently rolled out the beta version of its crypto wallet, which will allow Robinhood users to send and receive cryptocurrencies. Also, within the Robinhood app, a developer recently discovered code to a beta version of a stock loan program. The program would allow Robinhood users to loan out their stock to other institutions who require the stock to settle trades or conduct short sales. Through the Stock Loan Income Program (SLIP), Robinhood users will have the opportunity to earn passive income by lending their shares.
Also, Robinhood is preparing to roll out a new cash management feature that will allow users to have their paychecks deposited into their Robinhood accounts up to two days early. There’s also a spare-change feature coming to Robinhood, similar to the feature found on Acorns.com and Stash.com, where a user can choose to round up a purchase that costs $3.50 to $4.00, and have the additional $0.50 invested in a select investment.
The features in Robinhood’s queue to release will help the company address the third point of keeping people on the platform, and move the company towards being a full service financial platform. Still, I’d like to see Robinhood do more of what has worked for it in the past, by rebooting the API and releasing the top stocks bought and sold on the platform, as well as really leaning into crypto.
Robinhood would be wise to remember the mistakes of Coca-Cola and New Coke. Pleasing the critics and not the fans can have terrible consequences.