Robinhood Has Lost its One True Advantage

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Robinhood Markets

posted a wider-than-expected loss in the fourth quarter and said that its revenue would slump in the first quarter. But the biggest red flag for the company is in its user growth numbers. An important advantage that Robinhood had over its competitors for the past few years appears to be gone, and there’s no sign of how it will get it back.

Investors appear to have mixed feelings about the earnings report. After trading sharply lower in premarket hours, Robinhood (ticker: HOOD) stock was up 5% on Friday. It may be a bit of a relief rally, given the stock has fallen 34% this year already.

Robinhood’s most impressive advantage in its early years was that it could add customers faster and at a much lower cost than competitors. The company used waiting lists, referral bonuses, and low-cost marketing to add customers at a fraction of the cost of its competitors, who on average spent more than $100 a customer in advertising and marketing costs, according to research by CFRA analyst Pauline Bell.

Robinhood had nearly one million customers on its waiting list before it even introduced its trading app in 2015. While competitors spent money on television and digital ads, Robinhood’s spending largely amounted to the cost of the free stock it gave away for each referral—which was generally less than $10.

User growth numbers had made up for the company’s other shortcomings, including the fact that most of its customers had very small balances, with a median balance of $240 as of last February.

But its growth advantage is now eroding. Customer additions have slowed considerably in the past two quarters. Robinhood gained just 200,000 customers on net in the second half of 2021.

Charles Schwab

(SCHW), Robinhood’s older and stodgier peer, added 900,000 over the same period. 

When word-of-mouth stops working as a customer acquisition strategy, signing up new people can get very expensive.

In 2020, a year when Robinhood added 7.4 million net funded accounts, it spent $186 million on marketing—or $25 per account. In the latest quarter, it spent $44 million on marketing, or about $147 per net new account.

Asked in a briefing with reporters about the slowdown in new accounts, CFO Jason Warnick said that some of it has to do with “general market conditions.” The excitement over

GameStop

(GME) and other hot stocks propelled the firm’s user growth in the first half of the year, but that has died down.

Other aspects are in the company’s control. Warnick thinks new features like recommendations for exchange-traded funds, and features to help them manage their day-to-day spending, could bring in new users. But the company is unlikely to start spending heavily on ads. “It’s not something that we’re going to just throw marketing dollars at,” he said. “I think it’s more important that we get the product right, and let customers who are excited about it tell their friends.”

Robinhood also expects a technical change to help it add assets. The company has just started allowing users to bring assets from other platforms into their Robinhood accounts, a system known as Automated Customer Account Transfer Service (ACATS). Previously, they could only transfer assets away from Robinhood.

Warnick thinks there’s still a large untapped market out there, and Robinhood can keep signing new users in the millions.

“We’ve done some internal research,” he said on the company’s earnings call. “It suggests that of the demographic of 18- to 49-year-olds, a little over half have a brokerage account. And in our research, it suggests that currently, there’s about 10 million or more that are — currently don’t have an account and are interested in participating in the stock market. There’s a long-term trend of increasing retail participation, and we think that’s a great place to be able to leverage and participate.”

The question will be whether Robinhood will have to start paying even more to get their attention.

Write to Avi Salzman at [email protected]