Robinhood’s Way Out of the Woods

Short selling doesn’t help much

Robin Hood hero

HOOD -2.82%

The market’s predicted share price. But it can be a key to the company’s much-needed revenue growth.

Even as the stock tumbles, down more than 40% so far in 2022, Robinhood is busy rolling out new products. So far this year it has introduced a new debit card and extend its trading hours. It has also completed the rollout of its crypto wallet and listed the popular Shiba Inu coin while beginning its overseas expansion by announcing the acquisition of a UK crypto app.

These are moves that investors hope could spark a new wave of interest as last year’s trading frenzy continues to fade.

But while Robinhood may be building, the mass of new accounts is yet to arrive. Net accrual funded accounts only gradually increased to 22.8 million from 22.7 million in the first quarter. Monthly active users are denied. Total net sales fell about 18% from Q4 and Q1 and down more than 40% from a year ago.

Many of these products are in their infancy, so it’s too early to comment on them. But one metric might be the most important right now: Average Revenue Per User, or ARPU. That number dropped to just $53 in the first quarter. Robinhood on Thursday told analysts that as part of its push toward actively adjusted earnings before interest, taxes, depreciation and amortization at year-end, it needs to bring the ARPU into the mid-range range. year 80 dollars. The company is also reducing costs, most notably through approx 9% full-time employees.

So where does that extra $30 ARPU come from? Block an activity or account spike, it may not cryptocurrency improvement for now. CEO Vlad Tenev told analysts that “at this point, on an independent basis, we really don’t see wallets as a revenue driver.”

Instead, Robinhood could see meaningful user traffic increase from a passive activity: securities lending. So-called fully paid securities lending allows customers to lend their holdings, sometimes to institutions that want to use them to short sell, in order to generate some additional income. The more demand for the stock to borrow, the more money Robinhood and its customers can make.

Robinhood says the offering, which it recently began rolling out to a small group of customers, is likely to eventually grow about one to two times the revenue of its current margin lending business. . That alone could add a few dollars to the ARPU, even if users aren’t trading or investing more than they are currently.

Another ARPU driver that the company cites is continuing to improve will benefit advanced users. Notably, options trading, including by more sophisticated traders, is Robinhood’s most stable trading revenue generator — so anything to make money or attract traders Better option translations can both provide relatively predictable gains. Options-driven trading revenue of $127 million in the first quarter is still two-thirds of the peak seen in the first quarter of 2021. By contrast, equities and crypto revenue are at approx. 1/4 of the corresponding quarterly high water mark. .

Then there are rising interest rates and the benefits of good old cash. Higher rates can be bad news for the prices of underlying cryptocurrencies and stocks, but they can be great for brokers in many ways. Higher rates could boost Robinhood’s ability to generate interest revenue on cash balances and drive higher prices on margin loans. Robinhood is also able to attract more client assets with high yields on uninvested cashor earn money by instant withdrawal if the customer is in a hurry to transfer cash.

Securities lending and cash strategy may not be what many people think about when Robinhood goes public in the midst of a retail trading storm. But for now, these seemingly boring things could be one of the company’s most exciting opportunities to turn around its besieged stock.

Amateur investors took the stock market by storm a year ago, buying shares of meme stocks like GameStop and AMC Entertainment. Many people remember it as a revolution against Wall Street, but in the end, most of them just filled the pockets of big financial firms. WSJ’s Dion Rabouin explains. Artwork: Sebastian Vega (Video from 1/28/22)

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