Why Robinhood is departing from its roots - with a big bet on advanced traders

By Gordon Gottsegen

From a new desktop platform to futures trading, Robinhood has hinted at upcoming features geared toward advanced traders

The investing app that would shoot confetti when someone purchased a stock is looking to mature.

Online brokerage Robinhood Markets Inc. (HOOD) reported its Q2 earnings Wednesday evening, reporting $682 million in quarterly revenue and $188 million in net income to beat analyst expectations. That was a significant bump compared to the previous year, when the company reported $486 million in revenue and a net income of $25 million in the second quarter.

Shares of Robinhood jumped as much as 8.3% during premarket trading Thursday, but settled down a bit to open around 3% higher.

Read more: Why are millions of people paying for Robinhood Gold?

But between boasting about its impressive business metrics, Robinhood also hinted at several upcoming features for its investing platform.

One of these features is the ability to trade futures. Robinhood has hinted about rolling out trading index options and futures in the past, but the company has yet to make that available to customers. Futures trading tends to be something for more intermediate to advanced traders. However, Robinhood has seen a sizable appetite for options trading on its platform, so perhaps this will translate to other financial derivatives.

Analysts from JPMorgan were skeptical whether Robinhood customers would be willing to trade futures if the company charged a commission. Robinhood has yet to disclose how it plans to monetize its upcoming futures business, but it's worth noting that Robinhood already charges a small fee for its options contracts.

Another hinted feature is a revamped desktop app. Robinhood is known for its mobile app, and although it has the browser-based Robinhood for Web, this version closely resembles the mobile version. Because of this, Robinhood has adapted its product to have a more mobile-friendly experience. Open the app and you'll see a minimalist view of your portfolio and will be able to search for and invest in stocks through a simple interface. This type of experience caters to beginner investors or those just looking to trade on the go.

A new desktop app could be a departure from this casual investing ethos. Desktop platforms from other brokerages, like Interactive Brokers (IBKR) and TradeStation, are much more complex and information-dense. They cater to professional investors or more advanced retail investors who are willing to take the time to sit down, analyze data or track price charts and actively trade. But these active traders are exactly the people for whom Robinhood is transforming its product.

"We haven't really taken the lid off of the new active trader products. Our active trader business is the most mature and investments that we make there have the most immediate impact on our business," Robinhood co-founder and Chief Executive Vlad Tenev said during a Wednesday earnings call.

Tenev also said the company will host its inaugural "Hood Summit" in October. This summit will be a three-day conference in Miami, specifically geared towards its active trader customers. There, Robinhood will unveil new products and will give attendees the chance to test them early. The company has already sent invites to some of its customers.

By announcing products geared towards active traders, as well as hosting an event specifically for them, Robinhood is trying to cater to its most profitable customer base.

Robinhood made $327 million in transaction-based revenue in Q2, meaning the company profits when its customers trade more. But this transaction-based revenue relies on payment for order flow - a business practice that is being probed by the SEC. On top of that, Robinhood's crypto business has also been subject to regulatory scrutiny. This puts the company in a position where it has to diversify its revenue streams in case regulators eventually decide to bring the hammer down.

One of these potential revenue streams is Robinhood's margin business. Robinhood lets its customers trade on margin, essentially loaning them money to trade and allowing the company to collect interest on that loan. In May, Robinhood rolled out lower rates for these margin trades in an attempt to take over more market share for what Tenev said could be a lucrative source of revenue.

"This is a huge opportunity for us as brokerage incumbents generate far more revenue on margin than even trading," Tenev said during the earnings call. He said that Robinhood previously struggled to get customers to take out larger margin balances, but after introducing lower rates, it saw margin balances grow 20% over five weeks.

Another profitable side of Robinhood's business is its premium Gold subscription service. Robinhood emphasized the growth of its paying Gold customers in its earning calls last quarter. In Q2, the number of Gold customers grew to almost 2 million. In the Q2 earnings call, Robinhood revealed that it makes seven times more in average revenue per user (ARPU) off its Gold customers compared to non-Gold customers.

This is why Robinhood rolled out features specifically for its Gold members, including higher yields on uninvested cash, deposit boosts and retirement account matching, a Gold credit card and those lower margin rates. In the earnings call, Robinhood said that it will continue to focus on increasing Gold adoption.

Robinhood's plans seem to indicate that the company will cater more and more to its active and advanced traders - after all, that's where the money is.

But doing so is a departure from what made Robinhood so popular in the first place. Retail investors know Robinhood as the mobile-friendly investing app that makes it easy for beginners to start trading stocks, ETFs and crypto. Robinhood probably won't forget about these novice investors, but it seems like the company is looking to mature into a broader financial-services provider. Perhaps Robinhood is hoping that serious traders start taking its platform more seriously.

-Gordon Gottsegen

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08-08-24 1149ET

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