The TRUTH About Robinhood



My thoughts about buying the hottest stock of the year – Robinhood.
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Today I wanted to talk about investing in the hottest stock offering of the year – Robinhood, the app for beginner investors went public yesterday, should you invest in it? Let me give you some good and bad about buying the stock.

THE GOOD:
1. Robinhood has over 18 million funded accounts with over 100 billion dollars of assets under management making them the third biggest broker in the world. In 2020 they grew their revenue from 277 million to 958 million which is a growth rate of 245%. And the first quarter of this year, their revenue is already 522 million which is up 309% over the same period of last year. And a 2020 Gallup poll says that roughly 68% of people between the age of 18 and 29 don’t have any money invested in the market so by this metric there’s definitely room to grow.

The downside to those numbers is that was when everyone was at home, they were bored so they got a lot of new customers which is not a sustainable growth rate under normal conditions.

2. Their public offering reserved more shares for retail investors than the average IPO. This is because when most companies go public, they will hire investment banks to sell their shares for them which means different banks will get different percents of the shares. After the big guys have taken their cut, the retail investors are served last – typically something like 10% of whatever is available.

This can sometimes drive the price artificially higher because of more competition amongst retail but also more manipulation from the bigger companies. Robinhood on the other hand decided to reserve more shares for the public, anywhere between 20% to 35% which is pretty big.

THE BAD:
The first downside future is growth potential. The average account value of Robinhood’s customers is $5,000 which is very little in comparison to something like Charles Schwab which has an average of $100,000 per customer.

This tell us that Robinhood’s average user is not necessarily the serious long term investor or they’re using Robinhood as their secondary broker with play money. This is bad for Robinhood because it corners their earnings potential. Their biggest competitors for example: Charles Schwab, TD Ameritrade, E-Trade, all of those big brokerages have diversified their income streams.

Robinhood makes roughly 80% of it’s revenue from something called payment for order flow which is controversial. Robinhood makes most of its money by routing our trades to market makers. Market makers like Citadel and Melvin Capital for example which are companies that don’t necessarily prioritize the interests of the clients of Robinhood.

This means that when we buy stocks on Robinhood, even though we don’t pay commission on those trades, we may also not necessarily always get the best price. Robinhood was forced to pay 65 million dollars in fines for not disclosing that. It is also why countries like the UK and Canada have banned making money from payment for order flow and their research found doing that gave investors better pricing for stocks in more than 90% of cases, up from 65%.

The risk is if our congress decides to regulate PFOF, it could wipe out up to 80% of Robinhood’s revenue model. If Robinhood tries to compete with companies like Charles Schwab and tries to recreate those same income streams, there’s no guarantee that people would use any of those advanced products because their customers are not “sophisticated” investors with a ton of money. It could also potentially change the user interface which right now is their greatest asset.

MY THOUGHTS:
I did not buy the stock on IPO day but I’m tempted to buy it in the future because I think most of the negativity is already built into the stock price. Being a contrarian and doing the opposite of what most people are doing can pay dividends and be a smart decision, assuming you believe in the future growth potential of Robinhood.

*None of this is meant to be construed as investment advice, it’s for entertainment purposes only. Links above include affiliate commission or referrals. I’m part of an affiliate network and I receive compensation from partnering websites. The video is accurate as of the posting date but may not be accurate in the future.

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  1. "One of the most important companies in the world of investing".. robinhood is barely known in europe. Andrei i dont wanna make false accusations but dont you think you are a little bit biased because you are sponsored by them? I mean, didnt you proudly say, that your opinion is not biased because you dont accept sponsoring? I mean, in your latest video you explain all the ways the stock market is rigged but dont even mention robinhood (!) Dont get me wrong, i really enjoy your videos, but i would love to get a response to this..

  2. I’ve recently had a Robinhood portfolio, Vanguard has had an emerging market ETF since 2005, tracking well to a broad index. Ticker symbol VWO. Except for the last year, the performance has been unimpressive

  3. @Andrei Jikh – DO NOT DO IT !! Payment To Order Flow is the only $$ they bring in. RH is not profitable and will get CRUSHED once regulation comes to Payment To Order Flow and it is coming. Read RH S1 their RISK section is literally the longest of any brokerage house. It’s INSANE !! They even say if or when Payment To Order Flow gets regulated they have NO RECOURSE !! In other words once they stop this and RH can’t screw over their customers they are FUCT !! I will for sure take the other side of your trade and short this fucker to the BASEMENT. Short term if you make gains take it kid and run. Long term RH price is going to the basement !! And yes I am a contrarian.

  4. Andrei, you are so incredibly genuine and honest. Your presentation of what you’re trying to teach is so refreshing, especially when it’s about finance. From the bottom of my heart, please keep it up! You’re an asset to the world!

  5. This was one of your best videos omg you are still giving content on vacation and it was hilarious how you made fun of all the flaws. Love the tour of the little cottage. Oh and I'm glad to hear what you thought about the Robinhood IPO because I was really considering buying it on the IPO day but I didnt know enough about it so I havent bought in yet.

  6. I started with Scottrade in 2008 and then in 2017 Scottrade merged with TDA and I started a account with a online broker called matador to save on commissions because they were zero commission broker and then they were rebranded Public today which is a good brokerage for someone new because it is social media/ online broker that you can follow people on and they can follow you too. I opened a robinhood account to get the free stocks and then at the beginning of 2021 they had the GME issue and some other brokers did as well so that is one strike for me with robinhood and then I went back into my account statements for robinhood and I looked at my first free stocks and buys and low and behold I find that robinhood starts everyone’s account as a margin account and it doesn’t matter they can say it is for instant deposits of your money so you can buy stocks immediately but I get the same from TDA and my TDA account is a cash account. I have since transferred all my stocks from robinhood to TDA to consolidate, less paperwork come tax time come 2022. I feel robinhood is doing some shady stuff with peoples accounts for everyone to have a margin account, I think robinhood could lend out shares from their customers accounts without their knowledge or compensation. I do know they can loan them out for sure because they give you instant credit to buy stocks and they can loan the shares out until the money that is deposited clears.

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