Cathie Wood is the founder and CEO of Ark Invest, an investment firm focusing on disruptive innovation. Wood’s flagship fund, the ARK Innovation ETF, aims to invest in companies developing technologies that could transform the future, including artificial intelligence, blockchain, and genomics.
Ark Invest is unique because it publishes its investments daily, allowing investors to peer into the mind of Wood and her team and see what stocks the fund is adding today rather than waiting for quarterly filings. Last week, the firm invested 1.1 million shares of Robinhood Markets (NASDAQ: HOOD) after the stock dipped 15% following earnings. Let’s explore the company and see if you should follow her lead.
Founded in 2013, Robinhood set out to “democratize finance for all,” making investing more accessible and affordable for retail investors. The company offers commission-free trading on its app and is a popular investment platform for younger people drawn in by its user-friendly interface.
The company has faced criticism for its gamification of investing, which some say leads to impulsive trading decisions and overtrading. It has also faced criticism for its payment for order flow business model, where it sends its order flow to a market maker to execute trades and earns a small fee in return. Some have argued that this creates a conflict of interest for the broker, which may focus on maximizing profits rather than giving customers the best available prices.
Robinhood was a big winner amid the pandemic, which saw huge demand for its services among investors and traders. From 2019 to 2021, the company’s net revenue went from $278 million to $1.8 billion, or 554% growth in two short years. While the growth was impressive, expenses ballooned for the fintech, and it posted a net loss two times larger than its revenue, at $3.7 billion.
The broker relies heavily on transaction-based revenue from its payment for order flow business model, making its earnings highly volatile and dependent on the amount of trading activity during the period. Last year, its transaction revenue was nearly cut in half, and total revenue declined by 25%.
Robinhood has struggled to gain traction and grow its customer base since that surge in trading activity. In 2021, the company boasted 17.3 million monthly active users (MAU), up from 11.4 million a year earlier. However, it has gradually seen a decline in its user base, with MAU falling to 11.4 million last year and down to 10.3 million in its most recent quarterly earnings.
On the surface, Robinhood’s third quarter wasn’t too bad. Its total net revenue grew 43% to $1.4 billion, and its net loss of $571 million was smaller than last year’s loss of $862 million.
However, the company heavily relied on net interest revenue to drive its growth in the period. In the quarter, $693 million in net interest revenue was up 169% from last year, as it benefited from one of the most aggressive Federal Reserve interest-rate-hiking campaigns in recent history. Transaction revenue, on the other hand, fell 7% from last year.
While it is a positive sign that Robinhood was able to take advantage of higher interest rates, investors can’t expect this to drive the company’s earnings forever. According to CME Group‘s FedWatch Tool, market participants expect three rate cuts in 2024, which would put a lid on net interest growth for the broker next year.
The broker has made several moves in recent years, expanding trading in some stocks to 24 hours, crypto trading, and offering individual retirement accounts with a 1% match on every dollar contributed. However, whether these actions will move the needle significantly for its top- and bottom-line growth remains.
Robinhood is making moves to grow its user base. However, it remains heavily dependent on trading activity for revenue and has its work cut out to generate reliable cash flows across different market environments. Therefore, I wouldn’t follow Cathie Wood’s lead to buy the dip quite yet.
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Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool recommends CME Group. The Motley Fool has a disclosure policy.
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