Robinhood: Apparently the place to lose all your money

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A few days before the Superbowl, Robinhood announced a partnership with Kalshi that allowed users to bet on the big game. Sports betting, or “prediction markets” as their lawyers would likely force me to say, were now accessible to users on Robinhood. 

This came to a halt when the CFTC requested that Robinhood remove “sports events contracts” from the platform the very next day. So for the time being, users of Robinhood would have to lose money betting on the Chiefs somewhere else (go birds). 

On one hand, getting into sports betting is a great move for Robinhood. A good portion of their users are just trying to trade highly volatile options that either lose 70% or gain 240% in a week (usually the former). Most people would consider these users “gamblers” and the exact type of person that is also using Draftkings bonus bets on a 9-team parlay. From that perspective, why not try to lean into sports gambling if you’re Robinhood? It fits exactly into this user's persona. 

While it could be a good move in the short term (emphasis on the “could”), this would be harmful for the long term performance and reputation of the company. Over the next few years, Robinhood has the opportunity to transform into a serious financial institution through its current retirement strategies partnered with a wealth management arm (will expand upon later). 

Look Under the Hood (yes, pun intended)

Right now, retirement is kind of killing it for Robinhood. Retirement assets under custody grew 9x in a year, accounts grew over 2x, and retirement users had 70% more assets on the platform than a typical user. Now, do these customers want their retirement brokerage also offering sports betting? I assumed not, but let’s check some twitter replies: 

Two big takeaways: 

1. It seems that replying to a tweet is an excuse to lose all spelling and grammar knowledge you may have. 

2. People do not want to see sports betting and gambling in the same app. 

The thing is Robinhood knows how to build. They currently have eight separate products doing over $100m in annual revenue and just reported $1b in revenue for the first time in last night's earnings (2/12).

When it comes to their future, they need to take the path that focuses them toward wealth management and retirement, not “prediction markets”. The CEO has mentioned multiple times on earnings calls the desire to get into wealth management, the roadmap points to this coming down the line, and customers are increasingly growing their assets and trust within the platform. 

Here’s my opinion for the future of Robinhood’s strategy:

1. Retirement is a strong business arm, lean into and keep growing your share here. 

2. Build or buy a Wealth Management arm. Users are beginning to trust you, and the market is ripe for disruption. 

3. You can get into “prediction markets”, but do it differently. Build or buy here as well.

Prediction Markets

On the last bullet, this is something we saw above in the misspelled feedback. If you want to do “prediction markets” do not include it under the same app. Have it be owned and operated by Robinhood, but don’t put it next to someone's nest egg. You can also buy instead of build here. Kalshi has been growing for a while and can likely be acquired for a little over $1b in a cash & stock deal. If you want to get cheaper, Novig fits Robinhood’s mission well and is going against the big players and making sports betting markets. They have raised a Seed round and can likely be acquired for less than $150m. 

Robinhood and Wealth Management

This right here is the big ticket item. Right now, the talk in wealth management is the $90 trillion generational wealth transfer occurring. Not even Dr. Evil could conceive that number. The space itself is aged and ripe for disruption on the technology front. Meanwhile Robinhood, is slowly building the ingredients that are key in the wealth management space, the most important of which being trust from users. 

A few key stats to support this: 

• Assets under custody is consistently growing (76% year over year) → more money in accounts = more trust in the platform.

• (As mentioned before) 2x growth in retirement accounts → people trusting Robinhood with their nest egg.

• Recent user cohorts' initial net deposits are much larger than older cohorts.
  

So with a user base that has a growing trust in the platform, there is a pathway to create a new wealth management arm. This again, can be a build vs buy scenario. On the buying front, Titan is the best player in the space here. Based on recent pivots and funding rounds, I would assume you could get them for under $1.5b. They are building the Amex for Wealth Management and could easily fall under the Robinhood umbrella. 

Now under the assumption that they want to build this in-house, I recommend spinning it up under a completely different section of the app with new branding. It can be called Robinhood Wealth, but I would also recommend looking into an entirely new name for branding purposes. Also, don’t take my advice here, I suck at marketing and branding. 

Anyways, Robinhood Wealth can leverage both AI and personal financial advisors to help grow the total AUM on Robinhood’s platform. Right now, a lot of revenue for Robinhood comes from trading fees, which is reliable, but not sustainable. In the long term, growing AUM is the name of the game for financial institutions. 

Let’s do some Napkin Math. 

Robinhood favors the subscription model based on the one other product that users actually have to pay for, Robinhood Gold. Most Wealth Management firms charge a fee-based rate on your assets you hold with them (around 1%), but newer firms like Titan have changed to a subscription model. 

For hypothetical sakes, let’s measure out both. My assumptions are as follows: 

• Gold users have 7x AUC than avg users (sourced from earnings report, actually not assumed)

• Assume 2.25% of customers use WM (2.25% is 25% of the gold conversion)

• Assuming WM users, would put 5x assets than normal users

• Assuming a little higher conversion on fee based (25% more than subscription base)

The math:

The long and the short of it: 

1. A subscription model at $99/year with 558,000 customers, results in $55,242,000 in revenue. 

2. A fee-based model at 0.25% of assets with 697,500 customers, results in $54,928,125 in revenue. 

These models are very short-term focused. If launched, wealth management could easily be a $1b a year + revenue generator for Robinhood by 2027.

Hope you enjoyed my model building and overview of my thoughts on Robinhood. I will have to say, I love Robinhood’s momentum and was going to buy their stock, but I didn't love sports betting move so I didn’t. That decision really kicked me in the ass when they reported earnings last night and are up 15% on stellar results. Stay hot Tom. 

As always, strong opinions, loosely held.