Robinhood had a keynote event yesterday where they unveiled:
Deposit incentives (regular acct and 401K)
A new credit card
A new UI / UX
In the past year they've:
Rolled out 24 Hour trading
Built out their own crypto wallet
Attracted close to 20B in deposits
It's cool to see each of these individual features and milestones, but if you zoom out these are all a part of Robinhood’s revised business model.
Robinhood's business model
Robinhood has come a long way since the GME fiasco, but the approach they've taken is actually very simple.
At its core, there are three key metrics that Robinhood (and any other business) is trying to optimize for:
Customer acquisition cost (CAC) - this is the amount of $ it costs to acquire a user on average. There can be some nuance in what acquire means: whether it is deposit over a certain threshold, number of trades made, etc.
Lifetime value (LTV) - this the amount of $ that the average user will bring in over their course of time on Robinhood (accounting for operational costs)
# of onboarded users - this only makes sense if CAC <= LTV
So now we can reframe everything that Robinhood does as:
How does this increase LTV and/or decrease CAC?
Considering LTV >= CAC, how does this onboard more users?
To further generalize, Robinhood’s approach is to aggressively increase LTV by bundling a relatively dispersed market of financial services, eat the CAC, and onboard users aggressively by giving up margins on each individual service.
To tie this altogether - as a very successful businessman once said "the only way to make $ is bundling and unbundling" and Robinhood branded their attempt bundle as:
Robinhood Gold
Robinhood Gold is the personal finance equivalent of Amazon Prime.
The financial services industry has scattered over the past few decades (credit card from amex, fidelity brokerage, banking with chase) it is ripe for a bundling again. Robinhood gold is that attempt.
If we step back, Robinhood's core business is around trading. When users are buying/selling on their platform they make $. If you look at the trading volume on Robinhood, it most certainly correlates with the amount of deposits on their platform. By getting more deposits per user, you increase their LTV (all things equal).
A great way to attract customers (and deposits!) is offering (aka bundling!):
deposit matching (1-3% across individual/retirement accounts)
cash sweep accounts that pay more than any other money market/high yield savings account and
a credit card that has rewards comparable to those with a $500+ annual fee
Also side note: if you wanna check out the gold card, please use my reflink — this just helps me qualify for a card that is solid gold lol
But isn't Robinhood losing $ on these benefits? Yes, this is what the customer acquisition costs are composed of, but if you look at the average revenue per user breakdown:
and the net interest revenue:
It is clear that so long as Robinhood is able to get more $$ onto their platform, they have ways of effectively monetizing (beyond transaction revenues). It then becomes a direct trade-off between CAC vs. onboarding more users.
Additionally, these benefits ultimately make Robinhood stickier — these features improve user retention which ultimately increases the expected user LTV. It’s clear that Robinhood is aware and they are doing what they can to improve user retention:
To conclude - these parameters (LTV, retention, CAC, growth rates) fit perfectly in trad-fi valuation models. Given Wall St loves to project into the future, these updates strengthen my conviction.
Vlad Tenev and the team have played the game well, the last 2 years post GME fiasco haven't been the greatest, I have a bullish a bullish outlook on Robinhood over the next 6-12 months.
I totally agree.