Breakingviews: Robinhood’s growing pains could use some Buffett

“God is getting just” with stock-trading app Robinhood Markets, according to the vice chairman of Warren Buffett’s Berkshire Hathaway, Charlie Munger. The 98-year-old’s comments came a day after the company’s shares hit a record low. While harsh and perhaps self-serving, there’s something to Munger’s sentiment. Robinhood could use a bit of his boss’ conservative thinking.

The trading platform’s stock has fallen 70% since it went public in July last year, versus a 6% decline in the S&P 500 Index. Berkshire, steady as they go, is up 13%. A year ago, the picture looked different. Robinhood introduced millions of first-time investors to options trading without commissions. As stock prices rose, the platform was not only eating traditional competitors’ lunches, but looked like it could reform retirement investment, too.

But with pandemic lockdowns and surplus cash from stimulus checks gone – not to mention a decline in equity values – the day trader is fading. The $9 billion firm run by Vlad Tenev, which reported results on April 28, saw total net revenues fall 43% in the first quarter this year compared to last year. More than 70% of that revenue is from so-called transaction-based revenues: Routing user orders to firms who pay for them, allowing Robinhood users to trade for more or less free.

Now Robinhood needs to reinvent itself, and older trading platforms show a more promising future. Nearly half of Charles Schwab’s total net revenues in the first quarter were from net interest revenue, earned from taking cash sitting in brokerage accounts and making more stable investments in Treasury securities, for example. A rise in interest rates will help this business. According to its January update, Schwab expects to make up to $1 billion in incremental revenue for each 25 basis point hike in the target fed funds rate.

The trouble is Robinhood’s initial plans to diversify have whiffs of risky business. Among other things, it is letting customers invest part of their paychecks with ease and will offer retirement accounts later this year. That makes the platform more attractive to users looking to invest for the long term. But, the products might take a while to diversify the company away from the type of freewheeling trading that Munger doesn’t like.

As Munger might point out, and as this year’s stock market shows, it’s also not a great retirement plan. Long term, any business that facilitates investments is only as good as the returns it helps to provide for the people who entrust it with cash.