Robinhood Markets (HOOD) tees up to report for the third quarter after the disruptive stock-broking startup was itself upended by regulatory scrutiny and disclosures tied to a huge source of revenue, called payments for order flow.
The company staged a weak initial public offering in July but the hot IPO stock attracted tech-savvy millennials as well as Ark Invest’s Cathie Wood. Her flagship Ark Innovation ETF (ARKK) held 5.7 million shares of Robinhood stock as of Oct. 25, up from 3.6 million at the end of July.
Wood bought HOOD stock on the dips amid uncertainty over the future of payments for order flow. Wood also owns Coinbase (COIN), a crypto trading platform.
Estimates: Wall Street expect Robinhood to lose six cents a share in Q3 vs. EPS of 13 cents in Q2, according to FactSet. Quarter over quarter, revenue is seen falling 23% to $437.1 million.
Quarter over quarter, analysts on average see funded customer accounts growing by 8% to 24.4 million while Robinhood’s average revenue per user (or ARPU) falls by 32% to $73.99.
Results: Check back later for Robinhood earnings.
Shares of Robinhood Markets fell 1.5% to 39 in Monday’s stock market trading, not far from its July 2020 IPO price of 38.
A recent regulatory filing about the share sale showed that 72% of Robinhood’s total revenue in 2020 came from payment for order flow (or PFOF). But that business model is under scrutiny: Regulators worry that retail traders are not getting the best price execution, with PFOF creating a conflict of interest for brokerage companies.
Officials in the U.S. also have crypto trading, which Robinhood offers, in their crosshairs.
Founded in 2013, Robinhood app transformed the way millions of Americans invest in the stock market with its zero-fee trades.
But even ahead of the hyped-up Robinhood IPO, the company faced controversies. In March 2020, Robinhood app went down during a period of extreme volatility, leaving furious customers unable to trade stocks. And early this year, during the meme-stocks frenzy, Robinhood came under fire for restricting buys of volatile stocks, such as GameStop (GME) and AMC Entertainment (AMC).
The future of payment for order flow is the biggest question now. Other stock brokers including Charles Schwab (SCHW), Interactive Brokers (IBKR) and E-Trade, owned by Morgan Stanley (MS), also make money from PFOF. But Robinhood relies more heavily on this revenue model.
Charles Schwab stock eased 0.8% Monday, after rallying on an Oct. 15 earnings beat. Interactive Brokers dipped 0.7% and Morgan Stanley edged up 0.1%.
In 2020, Charles Schwab and Morgan Stanley tried to fend off Robinhood’s rapid rise, acquiring TD Ameritrade and E-Trade respectively.
Find Aparna Narayanan on Twitter at @IBD_Aparna.
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