Why Robinhood Perfectly Encapsulates The Problems For Some Growth Stocks Right Now
It is safe to assume that many of Robinhood's employees had a very rough week.
On Tuesday, the company announced that it was laying off a staggering 23% of its workforce. This came after an earlier layoff of 9% in April and underlines the challenges that are facing the controversial brokerage popular with new and young investors.
As with Shopify, Robinhood had a great pandemic and is now struggling to find its footing and grow sustainably in an era with more than a few headwinds.
Also like Shopify, the brokerage's leadership are trying to take it seriously and confront their challenges head on, which is both wise and will hopefully work out in the long term.
They are a vibrant company with a popular product in a sclerotic and technologically backwards industry. There is a massive opportunity to disrupt the existing players - but of course we would say that!
Anyway, it would be foolish to count them out and it is notable that investors sent their stock up sharply after the announcement of redundancies.
But it is equally striking how serious their position is:
We couldn't help but notice from doing some quick research that, while Robinhood is losing clients and revenue, other brokerages are doing not just fine but continue to grow.
For context, to do just a very quick compare and contrast:
Robinhood has lost 44% of its revenue over the last year and its client accounts has fallen to 14 million down 1.9 million in the quarter from over 21 million last year.
Meanwhile, Charles Schwab added 1.2 million accounts in the first quarter and another million in the second.
Schwab's revenues also rose, over 13% to surpass $5 billion.
The details are, in some ways, even worse: transaction-based sales tanked 7% from the previous quarter. Sales from options and stock transactions fell 11% and 19%, respectively and the company lost a staggering $80 million on an adjusted operating basis.
Similar to Shopify, what ails Robinhood isn't purely a matter of the business cycle moving against them or regulatory or structural constraints. Their core business may not be able to grow sufficiently quickly to attract further capital to allow them to sidestep the inconvenient fact
As a reminder, our Shopify work is here.
It may have gone unnoticed during the great hype of the golden age of growth stocks but Robinhood's underlying business is potentially caught in a pincer between regulatory agencies on the one side and better capitalized and competently run businesses on the other.
Clearly investors are hopeful that the company are beginning to grapple with the challenges in front of them and this could be the first step towards a positive outcome over the long term.
But its share price is still down over 75% from the level at which it IPO'ed onto the public markets. That is quite a staggering fall and many of their employees will be partially compensated in shares based on that price. As if things couldn't get any worse, they will likely have been further dismayed to see the stock give up their post layoff bounce on Friday and then some.
Nothing more ironic than good news for the job market being bad news for the company that you have just survived a round of layoffs at.
In summary, the simple fact is if a business a) isn't profitable b) loses large amounts of money and c) doesn't grow, it will not be a very attractive business not just for investors but also to work for as a highly qualified employee.
Put differently, growth companies are not much fun if they don't grow. The incentives are all wrong for just about everyone.
As usual it isn't clear that Robinhood's leaders are really helping matters. One wonders how company morale will recover when the CEO is sending out company-wide emails like the following:
Everyone will receive an email and a Slack message with your status - with resources and support if you are leaving.”
Ouch.
We are here to do our part though. Pebble lets no opportunity pass it by. Know someone from Robinhood who was unfortunately let go or is desperate to leave?! Have them reach out at contact@pebble.finance
We are keen to meet and while remaining pretty humble about our company and its product, we are definitely about as different from Robinhood as you can get!
Thanks!
*******
Have questions? Care to find out more? Feel free to reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.
