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The Company Changing Investing Forever
Robinhood may be the most disruptive company in fintech today.
Travis Hoium
April 07, 2024
In partnership with
The stock market had a down week this week after some Federal Reserve officials indicated that interest rates may stay higher for longer than expected. This shouldn’t be a huge surprise because the economy is handling rates just fine.
More importantly, earnings season begins later this week with some big banks reporting on Friday, so we will see how companies see the broader economy in their numbers and commentary.
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Invest before this company becomes a household name
What if you had the opportunity to invest in the biggest electronics products before they launched into big box retail, would you?
Ring changed doorbells and Nest changed thermostats. Early investors in these companies earned massive returns, but the opportunity to invest was limited to a select, wealthy few. Not anymore. RYSE has just launched in 100+ Best Buy stores, and you're in luck — you can still invest at only $1.50/share before their name becomes known nationwide.
They have patented the only mass market shade automation device, and their exclusive deal with Best Buy resembles that which led Ring and Nest to their billion-dollar buyouts.
In Case You Missed It
Here’s some of the content I put out this week. Enjoy!
What I’m Buying: April 2024: I invest in Asymmetric Universe stocks each quarter and this month I added two new stocks to the portfolio.
Spotify’s Prices and 10x Potential: Spotify is raising prices again and it shows the company’s pricing power and bundling potential.
Alphabet and Seeding the Forest Over Trees: The market has been worried about threats to Alphabet’s business from AI, but if we look at the bigger picture, Alphabet is built to thrive in an AI world.
A Massive Red Flag for EV Stocks: Tesla’s terrible delivery numbers for Q1 2024 show weakness in the EV market at the worst time for some companies.
Robinhood Is Too Good To Be True
I don’t say this lightly. Robinhood changed the way I look at brokerages forever and since this is an investing newsletter I want to share what I’ve learned. I promise I will get to the investing takeaway in a moment, but first I need to explain my excitement behind a brokerage app.
When Robinhood announced the Robinhood Gold Credit Card with 3% cash back, I thought it was a brilliant customer acquisition tool and was a big reason I highlighted the stock with a spotlight article last week.
I have now set up and funded an account on Robinhood and this might be the best brokerage I’ve ever used.
It took less than 3 minutes to set up my accounts and Robinhood gave me money to join the platform. It sounds crazy, but it may just upend the financial services industry as we know it.
Robinhood Makes It Easy To Invest More
I find it useful to find little ways to trick myself into investing more. And Robinhood makes that simple.
Reward cash back can be sent straight to the Robinhood brokerage account
A 1% deposit match on ALL DEPOSITS gives a boost to any money invested.
It’s like investing 4% of my money before adding any of my own money to the account.
Benefits You Can’t Get Elsewhere
The theme of the spotlight article was that Robinhood is playing a different game than other brokers. While most banks and brokerages have branches and staff that are expensive overhead, Robinhood is a digital platform. Saving on overhead can go into customer benefits that draw more money to the platform. Those benefits include:
5% APY on cash in the account
3% IRA Match
Lending shares
Ability to invest in IPOs
24-hour trading on some stocks
These sound like crazy benefits, but they make sense when you think about how Robinhood makes money differently than most brokers. And they could be a draw for millions of people to join the platform.
How Robinhood Makes Money By Giving You More
Robinhood can benefit customers because it’s making money by simply having more assets on the platform.
High-Interest Rates
The 5% APY on cash for Gold customers is a relatively low-cost form of capital given the 12% rate Robinhood charges for margin.
Robinhood Financial charges a standard margin interest rate of 12% and a margin interest rate of 8% for customers who subscribe to Gold.
12% minus 5% is a nice 7% spread for a financial institution.
Most brokerages don’t allow retail investors to lend shares to short sellers because they don’t have to. But Robinhood does at a $5,000 account limit and investors can make money depending on the market rate for the stock.
When we borrow shares of a particular stock from your account on a given day, you’ll earn whichever of the following earns you more money: A rebate that is 15% of the weighted average rebate rate we earned by lending that stock to borrowers on that day. Or $.01 for your total position in that stock that was borrowed during that month. This would be your share of the rebates Robinhood earned for that stock on that day (across Robinhood's introducing broker and clearing broker).
Robinhood takes no risk by lending shares and gets to take a cut just to facilitate the transaction. Not a bad business.
3% Cash Back on Credit Cards
Credit card issuers usually make a little over 2% on credit card transactions, so Robinhood’s 3% cash back is subsidized.
Management has said they can make up for the cost by charging high-interest rates for customers who keep balances and with other products like brokerage margin, payment for order flow, and share lending fees for those who don’t carry a balance.
3% IRA Match
Users earn the IRA match over 5 years, so the match is incentivizing a long-term relationship with Robinhood.
3% match requires Robinhood Gold (subscription fee applies). Keep Gold for 1 year and the IRA for 5 years.
Once assets are on the platform, Robinhood can make money from lending shares, payment for order flow, margin, and more.
Subscription Fees
Most of the benefits on Robinhood require a Gold subscription, which is $6.99 per month. That’s $84 in annual revenue to offset the benefits paid. If we assume Robinhood’s benefits are 1% higher than the competition, Gold customers need to spend/add $8,400 to the platform for the fee to make sense. That incentivizes a lot of assets and activity on the platform.
Robinhood is leveraging the fact that it doesn’t have high fixed costs for physical buildings, brokers, bank tellers, loan officers, and all of the other overhead that goes into running a traditional bank.
As a result, Robinhood can use a completely different playbook that other brokers can’t compete with. This is how disruption happens. It sounds crazy at first. But over time it becomes obvious — like free stock trades are now — and when the disruptor is offering a product incumbents can’t compete with you get a stock with 10x potential.
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Disclaimer: Asymmetric Investing provides analysis and research but DOES NOT provide individual financial advice. Travis Hoium may have a position in some of the stocks mentioned. All content is for informational purposes only. Asymmetric Investing is not a registered investment, legal, or tax advisor or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please, do your own research before acquiring stocks.
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