Get Cash Delivered and Take Private Jets on the Same App

Happy Wednesday. When it’s 78 degrees outside in March, there are not many better places to be than NYC. Lucky for me, that’s where I was this weekend. 

Numbers from the weekend include about 3 breakfast sandwiches, 6 slices of pizza, a healthy portion of Guinness, and one extremely frustrating Rangers loss at 12:43am late Friday night.

The Pre-brief

Last week, Robinhood announced a series of new products. If you remember a few weeks ago, I argued that Robinhood should be leaning heavily into the wealth management arm because of the outsized market opportunity. Turns out, this is exactly what they are doing and then some.

Now, usually I like to remain humble and even self-deprecating in most cases, but it turns out I was proven right with this argument. I love being right (who doesn’t?), so I for one really enjoyed this announcement.

While I was right about the fact that they will be leaning into wealth management, there is a little more to the story. Robinhood is not only going after wealth management, but every financial aspect of their customers' lives. 

I’m going to dive into everything below, but in terms of giving you an understanding of this essay, this is most similar to an investment report for Robinhood stock. As a disclosure, I do currently own shares in $HOOD ( ▼ 0.38% ) .

The New Products

To give a better lay of the land, I want to lay out all the new products that Robinhood announced at the event last week. 

1. Robinhood Strategies 

   • This is Robinhood’s first foray into wealth management. Strategies is a portfolio built for you based on your goals, and managed by a team of expert portfolio managers. This is a personalized approach to managing wealth for their clients (this is where I was right). 

2. Robinhood Banking

   • Robinhood is branding this as your own “Private Banker”. It fits along their theme of democratizing services once reserved for the wealthy. Banking includes a 4% savings APY, Cash delivery to your door, estate planning, professional tax advice, wire transfers, cash delivery, and more. They also give you access to perks like helicopter rides, private jet travel, tickets to events, and members-only vacation clubs. I also have no idea why they felt the need to include those perks but here we are. 

3. Robinhood Cortex 

   • This will be Robinhood’s first AI product. It is being marketed as an investment assistant to help you trade and invest better with real-time news analysis, reports, and setting pricing targets. 

For most normal companies, each of these three products could deserve their own launch event. I mean, Apple hyped up an entire launch event a month ago just to tell people they had a slightly thinner IPad. Robinhood seems to live in a different realm though when it comes to shipping product, just look at the last few years:

Robinhood used to be a cyclical business. When the market was hot and people were actively trading, even when it may have been bankrupt companies (shoutout Spirit airlines), the stock did great. When the market dropped, and trading activity fell off a cliff, the stock dropped 75%. The most recent products that Robinhood has launched feels like an effort to get out of this cyclicality and rely less on the performance on the stock market to drive their business.

Most of these new products are subscription-based (through Robinhood Gold) and are historically very sticky financial products. When was the last time you heard of someone moving their checking account or changing their private banker? Unless they committed fraud, It doesn’t happen often. If Robinhood can get their customers to convert to these higher-retention products, then they will be able to rely less on the stock market and become a stable-ish financial company comparable to that of a big consumer bank.

The Financials 

Alright, let’s talk numbers and stock prices. I believe that a good product means everything, and if you have a good product, you can build an incredibly valuable company (again, for some reason Salesforce is an exception to this rule). No one ever talks about the good pizza spot in town, they talk about the spot in town with the greatest pizza (Charlotte pizza sucks, except for this one place that has phenomenal pizza but acts extremely pretentious about it). Anyways, I believe that these good product developments will lead to substantial returns for Robinhood in the long term.

A good product has a few things at its core, but most importantly, they have a growing and loyal user base. Robinhood has this, and is now building products that are working to make these same users more valuable to the company (in terms of both retention and revenue per customer).

As we see, Robinhood started as a free brokerage. A very low margin product, with users that can leave at any second and go to another brokerage. This means low revenue per user, and low retention. 

Like any good product organization, every product built since the beginning has been toward an effort to increase their users retention and value. You see some companies sometimes like to build products that doesn’t increase retention or value. I’ll create a hypothetical example. Let’s say there was a professional social network called Ginkedin. Instead of making posts easily sharable through emails and texts, they instead decide to work on a tik-tok style video feed and games. In this situation, again hypothetical, some would say they have lost the plot of what new features their users want.

Back to Robinhood. To put this product development in layman's terms, you as a Robinhood user used to be worth $1 to the company's revenue. Now, with the new products and services, you are worth $5. This assumes that you convert as a user to these new services, but Robinhood’s track record has shown incredible adoption for their new products over time. 

This is where I believe investors have undervalued Robinhood. The product. They build incredible products at an incredible velocity. Yet, everytime Robinhood announces a new product, or in this case three products, investors don’t react. In the case of Robinhood, they only react to earnings, and usually to an extreme amount.

Out of the last 8 earnings, 5 of them had price reactions over 5% the following day. 4 of the 8 had price shocks over 10%. When the price reaction is to the upside, the average uptick for the day is 8.31%. 

There is a lot that happens in earnings calls that can lead to these dramatic swings, but my main point is we don’t see these swings near product announcements. We see these swings near earnings, meaning investors look to earnings for a true feel on the company. Over the next few years, I think we will see investors shift away from this and start to trade Robinhood more like a consumer bank rather than the meme-stock brokerage. 

How much higher can it go? Let’s run a few numbers. First, I want to look at the consumer arms of a few of the bigger banks on Wall Street. I am going to take the yearly revenues of the consumer arms of these banks and slap a 1.5x multiple on them. The 1.5 comes from the price-to-book ratio from each of these banks.

So, looking at these few banks, their consumer arms alone are worth more than Robinhood is worth right now (around $36 billion). I want to take into account a few things. First, most of these banks don’t rely heavily on their consumer arms. They have large corporate and investment banking revenues that drive a lot of their business. Likewise, Robinhood has transaction revenue that makes up around 60% of their revenue. The consumer business for Robinhood is around 39%.

My thesis is that over 10 years, Robinhood’s consumer business will begin to rival that of big banks. Of course, this is not financial advice and please consult a financial advisor before making any investment decisions.

Alright that it, sorry it was a long one.

Song of the Day

Last Friday, Mumford and Sons officially came back with the drop of their new album Rushmere. In my opinion, Truth, is the best song on the album. Truly pumped for these lads to be back touring and I have a hard time not convincing myself to go to Red Rocks in Colorado to see them.