Robinhood: Is the king of retail investors in the U.S. facing tragedy?
After reviewing the third-quarter report of the American retail trading king Robinhood$Robinhood(HOOD.US), it can basically be described as a capitalized tragedy.
a. Customer acquisition peaked, with only 100,000 new customers in the third quarter, and the average AUM per new user is around $100,000, which is fundamentally different from the $2,000 to $3,000 per user during the pandemic; moreover, finding new customers has become difficult, leading to a further increase in customer acquisition costs.
b. Commission-based income: Breaking it down by asset, stock trading activity saw a slight uptick, but the monetization rate has dropped to 0.0129%, and stock commissions actually decreased quarter-on-quarter; although the monetization rate for cryptocurrencies improved somewhat, trading activity declined, resulting in a drop in cryptocurrency revenue; only options trading remains relatively active, and with the commission per contract basically stable, options revenue has been maintained; however, overall commission income in the third quarter also declined.
c. Interest income: The fundamental issues are mainly twofold: 1. Interest rates have been cut, and although cash-type assets have increased, this type of interest income has declined; 2. The difficulty of borrowing securities has decreased: in the securities lending business, the yield on borrowed securities has also declined. Thus, the overall interest income has seen negative growth quarter-on-quarter, with only the financing business income holding steady.
Other income is relatively low, so I won't elaborate further.
d. Expenses remain high: Due to the difficulty in customer acquisition and the fact that personnel have already resumed growth, it is challenging to reduce expenses, which has led to a decline in profitability in the third quarter compared to the second quarter, with operating profit falling from 28% to 24%.
Overall, Robinhood's problems mainly lie in the revenue side, and the stagnation in revenue reflects deeper underlying issues, which I believe are mainly two points:
a. Customer acquisition has peaked under the old model, and acquiring new customers essentially means competing with peers like Charles Schwab for users. However, with the trading income per order already surpassing that of Charles Schwab, the so-called low-price attraction is no longer there. As it moves towards users with an AUM of $50,000 to $100,000, its product adaptability, without adjustments, is actually quite low.
b. Among existing users, the ability to activate AUM and user assets is insufficient, leading to low AUM users coming in, but their asset activity has not been sufficiently stimulated.
c. There has been no discovery of a true second curve business, leveraging its 24 million brokerage-type user traffic to cross-sell into new businesses, such as credit cards or small payments.
As a result, the outcome for the third quarter is: commission-based business stagnation, interest-based business struggling in a declining interest rate environment, and no second curve.
In this situation, it can be said that Robinhood's growth potential is basically gone, and the valuation should be adjusted to a value investment approach first
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