Robinhood Markets, Inc. has been in focus for Wall Street analysts and financial news outlets in recent months as the novel coronavirus shut down much of the economy.
Without sports to gamble on, millions are opening Robinhood brokerage accounts to invest in stocks, trade options, and even dabble in cryptocurrencies… all for free.
Analysts believe these new investors have significantly contributed to the market’s quick rebound from the March lows.
After becoming the first brokerage to offer commission free stock trades since its inception in 2013, Robinhood has quickly become the No. 1 trading platform for millennial investors (people age 24 to 39 today).
Roughly 80% of firm’s clients are millennials, with an average age of 26. And 90% of all clients check their Robinhood accounts weekly.
These millennials have lived through two financial crises in their lifetimes, so far… The Tech Bubble from 2000 to 2002 and the Great Recession from 2007 to 2009.
But they weren’t really old enough to experience the negative effects to their investment accounts because they were too young to manage their own at the time.
When they go back and study what happened in each case, they learn that each crisis only lasted 18-24 months. And they conclude that the best way to make money was to “buy the dip.”
Fast forward to today, and now the millennials are in some of their prime earning years. They have some extra income to invest in stocks. And with much of the economy still shut down, they are doing just that…
They’re buying the dip faster and with greater volume than most “Wall Street experts”… And they’re doing it all for free on Robinhood.
You see, Robinhood has already experienced 30% user growth since coronavirus gripped the market – from 10 to 13 million users. And the number of new Robinhood stock positions has already doubled from pre-COVID levels of 17 million, to 34 million today.
When these millennials saw stocks drop 35% in 5 weeks, they immediately opened new Robinhood accounts and started buying stocks “on sale” with higher conviction than most.
Their new investments are surely paying off so far, as the S&P 500 has nearly recovered to its all-time highs and the Nasdaq recently hit new highs just this week.
While all this recent news sounds great on the surface for Robinhood, that does not mean it will last forever.
The coronavirus will go away at some point. And when that happens, will these new investors lose interest and go back to gambling on sports or whatever else they were doing before the lockdowns?
Since we can’t answer that question with certainty, let’s take a deeper look at what else we already know about Robinhood’s underlying business… And if it makes sense to buy the stock at the IPO or not…
Here’s What We Know About Robinhood So Far and Whether to Buy the IPO
Launched in 2013 by two former Stanford grads and high-frequency trading systems engineers, Baiju Bhatt and Vladimir Tenev, Robinhood was the first stock exchange to offer investors commission-free trading along with zero account balance minimums.
Their mission is simple: to democratize finance for all. Bhatt and Tenev believe that everyone should have access to the financial markets, so they built Robinhood to make investing friendly, approachable, and understandable for all newcomers and experts alike.
Many wondered how the company would make money and survive against its competitors, who were charging anywhere from $10 to $50 per trade and required their customers to hold a minimum of $500 to $5,000 in their brokerage accounts.
But the founders already knew that financial exchanges made most of their money from other services. In fact, only about 25% of revenues come from trading commissions.
So, Bhatt and Tenev built Robinhood from the ground up to make money from these other income sources.
Robinhood makes money by collecting interest from customer cash accounts, much like a bank collects interest on cash deposits. And they get paid by market makers on each individual stock trade they’re able to execute on the behalf of their customers.
Other sources of revenue include a $5 monthly fee towards an optional service called Robinhood Gold, which allows investors to trade on margin; lending stocks purchases by these customers on margin; and fees associated with purchases people make using the Robinhood debit card.
Over the years, the numbers have spoken for themselves.
Since 2017, no stock exchange has experienced more explosive growth than Robinhood.
In April of that year, the company took in a $110 million investment round from venture capitalist firms valuing the business at $1.3 billion.
By February 2018, Robinhood had 3 million client accounts – the same as one of its top competitors, E-Trade Financial (NASDAQ: ETFC), who’s been in business 31 years longer than Robinhood.
To date, Robinhood has exploded to 13 million client accounts, compared to E-Trade’s measly 3.7 million. And after its latest $280 million investment round in May 2020, led by the legendary venture capital firm Sequoia Capital, Robinhood is now valued at $8.3 billion.
That’s 538.5% valuation growth for Robinhood from its April 2017 valuation of $1.3 billion.
Compare that to only 41% stock growth for E-Trade over the same timeframe, and it’s not even a competition.
Since I expect Robinhood to continue growing at a similar pace relative to its competitors, I think you should buy the Robinhood IPO when the company goes public. I’ll update you when they set a date. In the meantime, you can still invest in other private businesses now and make returns similar to Robinhood before they potentially go public…
