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Discount Brokerage Weekly Roundup – November 1, 2021

Even though Halloween may be behind us, things are still a bit… “meta.” While the world tries to wrap its head around the Inception-esque metaverse, it’s officially November, and, coincidentally, earnings season at a lot of publicly traded companies. If there’s one thing this past week has revealed, it’s that being in the public eye opens you up to a lot of scrutiny.

In this (post Halloween) edition of the Roundup, we look at the skeletons and Pelotons shaping the latest developments at US online brokerage Robinhood and dig deep to unearth what their latest earnings report reveals about their future plans. And in keeping with the snackable financial content theme, this week, we’re dishing out a lot more investor chatter from the forums.

Robinhood’s Latest Earnings: A Lot of Sizzle at Stake

In their second-ever quarterly earnings report as a public company, Robinhood reported to investors a Dr Jekyll and Mr Hyde disclosure of exciting features mixed in with frightfully grim earnings numbers. The result: a drop in share price scary enough to qualify for a thrilling amusement park ride.

So why did the price per share for Robinhood fall so sharply?

Robinhood’s Q3 earnings report revealed a substantial drop in revenues, a sharp increase in expenses, and an admission that growth, not profitability, is the focal point for this business for the near to intermediate term. In short, revenues dropped, expenses rose, and the outlook for growth was muted.

By Robinhood’s own admission, they are betting the big expenditures (or “investments”) in hiring people to develop new features will be ultimately more valuable over the longer term than the current snapshot of financial performance would suggest. The market, it seems, is a bit skeptical.  

As is the case with most earnings reports, the standard metrics of business health – including revenues, expenses and earnings – were covered in the latest Robinhood results. However, the numbers we’re most interested in for this online brokerage relate to the numbers of new accounts and activity per user on the platform. These stats tend to provide insight into the rate of adoption of a platform, as well as the kinds of users (active or passive) that typically make up their client base.

Churn Baby Churn

One of the more stunning graphs from the Robinhood earnings presentation was the Net Cumulative Funded Accounts chart. This past quarter, Robinhood ended up with 22.4 million funded accounts, a slight decrease from the prior quarter of 22.5 million funded accounts.

What is astonishing, however, is that they added almost 700,000 new accounts during the quarter and lost (or “churned”) 900,000, meaning that Robinhood lost more customers than they gained this past quarter, something that has not happened in the previous four quarters this data was reported. During the quarter, they also managed to regain (or “resurrect” in their lingo) about 100,000 new accounts.

Here’s what CEO of Robinhood, Vlad Tenev said in the investor conference call:

“In Q3, net cumulative funded accounts were 22.4 million, up 97% year-over-year and slightly off versus Q2. We As we previewed last quarter, in Q3, we saw considerably fewer new funded accounts and lower revenue as compared to Q2. In Q3, we added 660,000 new funded accounts, bringing our total additions for the year to 11.4 million, nearly doubling our customer base since the end of last year”

Granted, the last three quarters in the online investing industry have been unlike anything witnessed before in terms of retail investor participation, so it would be a reasonable assumption that new client growth could not continue at the same pace it has over the past year; however, as we’ve noted as recently as two weeks ago, new account growth at other online brokerages, such as Schwab and Interactive Brokers, has been positive.

To contextualize the performance of Robinhood in terms of new user growth, Tenev stated:

“Historically, our growth has come in waves. The surges have come during periods of increased volatility or market events. We’ve also seen that new customers join when we add new products and features, giving us some degree of control over our growth.”

When measured against the user account growth at Interactive Brokers and Schwab, however, Tenev’s comments reveal a concerning stall in terms of what Robinhood appears to be bringing to the table for investors. Both Schwab and Interactive Brokers have found ways to overcome the churn despite what the waves that Tenev describes. Perhaps, the fact that a firm like Interactive Brokers has had the kind of consistent growth streak it has reflects just how impressive a feat it is to accomplish, all the while charging commissions for trading.

Back to the Feature

Despite the challenging quarter and with another similar one likely on the way in Q4, Robinhood appears unfazed, setting their sights farther down the track.

Prior to their earnings call and even all throughout the call itself, bringing on top talent into Robinhood was a key point of emphasis as to what will help Robinhood get a leg up on competitors in both the traditional online trading world and the brave new world of cryptocurrency trading. To navigate the next chapter in the Robinhood story, they’re going big on getting creative.

Case in point, Dara Treseder, the Senior Vice President and Head of Global Marketing & Communications at Peloton, is joining the Robinhood Board of Directors. And, to boot they added 580 new full-time employees across the company during the quarter in areas like engineering, compliance, and customer service. While the latter two areas are intended to ensure operating stability, the heavy investment in engineering is a signal they are going full throttle at product development and refinement of their technology ecosystem.

Not entirely unrelated, another noteworthy development that caught our attention in the Robinhood conference call was related to financial content. Specifically, Robinhood Snacks is arguably one of the best-in-class financial content productions aimed at millennial self-directed investors. The content is “digestible” and entertaining, something that is exceptionally rare in the world of personal finance, let alone the realm of investing.

With over 23 million unique readers of their Robinhood Snacks newsletter and more than 10 million downloads of their podcast in the past quarter, there’s a sizeable reach to their content program. And it appears that content is going to now go farther. In the earnings conference call, Tenev announced a partnership with Snap (of Snapchat fame) which will distribute the Robinhood Snacks content on their channel.

Curiously, despite the strong following on their newsletter and podcast, the official Robinhood YouTube channel is sorely lacking in followers and their reddit page, which despite having 937,000 followers (at the time of publication) has very little commenting or interaction taking place on it. So, while the numbers on the podcast and newsletter are a nice flex, other public channels for Robinhood show a startling absence of engagement.

Like most earnings reports, ultimately, the bottom line comes into focus. For Robinhood, however, it is clear that they are still operating in “growth mode,” meaning they are spending considerable time and energy building out new features and working to improve delivery of existing ones. It is important to contextualize that they practically doubled their customer base in about a year, and although online investing is capable of scaling, there are limits – which Robinhood has evidently discovered.

For Canadian online brokerages and self-directed investors, Robinhood has served as a harbinger of the sorts of things to come in the online investing space. Aside from commission-free trading of stocks, there are several other features, such as cryptocurrency trading, promotions that use stock bonuses, and heavy emphasis on user experience (UX), that other online brokerages have adopted as part of their strategy here in Canada.

While investors in Canada have learned to hurry up and wait when it comes to features launched in the US actually coming to Canada, there’s no doubt that Robinhood influences a Canadian investor audience as to what’s possible.

Of course, since Robinhood’s commission rates are at zero, everyone, but especially shareholders, are curious to see what their next act is going to entail.

From the Forums

Shifting Attention

One of the curiosities of the Canadian online brokerage market is how slowly other providers in the space are lowering their commission rates down to zero, despite the presence of three companies now offering trades at this rate. In this post from the Financial Wisdom Forum, one user elegantly sums up what big bank-owned brokerages need to fear about the shift to a competing online brokerage offering commission-free trades.

Negative Sentiment

Like the stock market, there’s a strong relationship between sentiment and loyalty when it comes to online brokerages. In this post from reddit, one user relays their frustration with the state of their current online brokerage (Questrade) and whether or not the time is right for making a change.

What’s in Your Wallet

Cryptocurrency trading at Wealthsimple is a very popular (and sometimes controversial) feature. One of the biggest pain points with customers, however, is the limitation on withdrawing crypto into an external wallet – something that this post on reddit indicates is going to be changing soon. Read more for responses from other investors.

Early Birds

Trading on the stock market is just too exciting for some self-directed investors. In this post from reddit, one investor asks whether any online brokerages allow trading ahead of regular market hours. Not surprisingly, there are others who are curious about this feature too.

Error of Commission

When is a good deal on trading via an online brokerage platform? With so many providers in Canada charging slightly different pricing of self-directed investing, sometimes the costs of paying a commission are outweighed by a simpler or more robust feature set. Find out in this post on reddit whether one user is paying too much.

Into the Close

It’s going to be a big month across the board. From new online broker promotions to feature launches and even some great updates from Sparx Trading in the mix, the official launch to RSP season is here. You could say the launch is going to be so… meta.