Robinhood Is Making Changes. Keep an Eye on Its Stock.

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Robinhood Markets

stock is in the doldrums, down more than 50% from its initial public offering price in July. The company is making moves to reverse that decline—but unlike in the past, now it isn’t relying on meme stocks or Dogecoin. Instead, its latest transformation could make it look a little more stodgy, and perhaps more profitable.

When Robinhood (ticker: HOOD) went public, it traded at a wildly inflated valuation based on earnings that are still years away from fruition. That’s why Barron’s warned investors to stay away from the initial public offering (“The Robinhood IPO Is Coming Soon. Steer Clear,” July 23, 2021).

Robinhood’s stock is now trading at about seven times its expected 2021 sales, down from about 20 at its debut.

The company still doesn’t have a clear path to profitability, but its latest moves point toward one direction. What it does have is 22 million customers, a remarkable feat for such a young firm.

The company announced on Thursday that it would appoint Steve Quirk, the former executive vice president of trading and education at TD Ameritrade, as its chief brokerage officer, a new position. He’ll oversee the company’s broker-dealers, Robinhood Financial and Robinhood Securities. In its announcement, Robinhood emphasized Quirk’s more than 35 years of brokerage experience.

Robinhood’s top management team has been more tech-weighted, with several top executives coming from places like

Alphabet

(GOOGL) and

Amazon.com

(AMZN). That may have helped Robinhood impress users with its easy-to-use interface and tech features. But the company couldn’t convince them to park much money with the brokerage firm.

The biggest sign that Robinhood is looking to broaden its model is a new program that will steer new investors into more-diversified portfolios if they ask for help.

For years, Robinhood has introduced new customers to its platform with a free stock and visual cues like scratch-off tickets. It has adamantly denied that doing so made its platform more like a lottery or gambling app.

Its latest innovation, announced on Tuesday, will instead direct new investors to a much more plain-vanilla strategy: buying a basket of exchange-traded funds.

“The recommended ETFs will give customers exposure to a diverse set of domestic and international equities as well as exposure to the U.S. bond market,” the company said in a blog post.

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If the ETF package attracts investors, it could be a significant step toward remaking Robinhood’s business model. More than three-quarters of Robinhood’s revenue comes from transactions, a percentage that it will have to reduce in order for the company to flatten its boom-and-bust financial trajectory and produce steady earnings.

More-diversified investing, and fewer lottery tickets, could be a first step to getting there.

Write to Avi Salzman at [email protected]