Robinhood Wants to Be Taken Seriously. Its Business Model Says Otherwise.

The third-quarter earnings report was expected to be weak because of low trading volume, but the numbers were much worse than almost anyone expected. Robinhood lost about 100,000 net subscribers in the quarter, posted a wider-than-expected loss, and saw its revenue fall 35% from the prior quarter. Its fourth-quarter guidance promised more of the same ahead. 

Going forward, the company’s path is unclear. Robinhood is trying to satisfy regulators who are skeptical of its main revenue source, and may place new limits on cryptocurrencies, which have driven much of the company’s growth.

CEO Vlad Tenev said repeatedly on the earnings call that Robinhood was aiming to make its platform safer, and to make sure customers invest responsibly. The company has said that the people who use its platform are buy-and-hold investors. But its business model is geared toward people taking risks.

Robinhood, which does not charge an upfront commission to trade, makes about three-quarters of its revenue from payment for order flow, which are payments it gets from market-makers who execute its customers’ trades. The more people trade, the more money Robinhood gets.

Some kinds of customer trades are particularly lucrative. Robinhood made nearly half of its revenue in the third quarter from payment for order flow on options trades. Options trading has surged on several platforms in the past two years as novice investors place long shot bets on stocks, often using out-of-the-money call options. Most of those bets end up being worthless.

Robinhood did not detail what kind of options its users have been buying, and did not comment on a follow-up question from Barron’s looking for details about those trades.

To boost its earnings in the future, Robinhood will either have to revamp its business model—earning more from plain-vanilla investing or customer deposit—or it will have to ride a new investment wave.

Asked by an investor on the earnings call about retirement accounts, Tenev said that the company was “committed to” adding retirement accounts in the future. But there are few other signs that Robinhood is reorienting its business, aside from continued growth in its cash management product that may help it earn more interest income. That leaves the company waiting for a new investing fad to take hold. 

To catch the next rising star, Robinhood could run afoul of regulators, however. For instance, Tenev and CFO Jason Warnick said that they were being cautious about adding new cryptocurrencies given that the Securities and Exchange Commission has warned that many coins are actually unregistered securities, meaning that it’s illegal to trade them without giving investors additional disclosures.

Investors are now clamoring for Robinhood to add the Shiba Inu coin, another lighthearted cryptocurrency that is a kind of rival to Dogecoin, which itself started as a joke. More than 330,000 people have signed a petition asking Robinhood to add Shiba Inu, which was recently added to Coinbase Global (COIN). Asked on the call about whether Robinhood would soon add new coins, Tenev emphasized that “we’re having to carefully evaluate whether we can add new coins in a way that’s safe for customers and in line with regulatory requirements.”

Robinhood won’t be your grandfather’s broker, and that is probably a good thing. It has a new niche and a new audience. But if it’s aiming for a middle ground between a boring ETF and YOLOing Shiba, it hasn’t found it.

Write to Avi Salzman at avi.salzmanbarrons.com