Here's Why I Won't Buy Robinhood Stock

Robinhood's (HOOD 2.50%) popular trading app has done quite a bit to democratize investing, such as pioneering the concept of zero-commission trading several years before most brokers adopted the concept. However, in this Fool Live video clip, recorded on Sept. 20, Motley Fool contributors Matt Frankel, CFP, and Jason Hall discuss why you aren't likely to find the stock in their portfolios anytime soon. 

Matt Frankel: So, everyone knows Robinhood. The recent numbers look fantastic on the surface. The revenue is skyrocketing. They grew their business from 9.5 million funded accounts a year ago to 22.5 million now. More than doubled year-over-year, just the number of users. The assets under custody, that is the money in their accounts has more than tripled in the past year.

That sounds great, doesn't it? Think about this, of their transaction revenue, 90% comes from either cryptocurrencies or options. Only about 10% of it comes from stocks. My question is, is that sustainable? 51% of the revenue, to be specific, came from cryptocurrency trading. 34% of that came from Dogecoin (DOGE 3.57%), by the way. That scares me in and of itself. I'm not trying try to get down on Bitcoin (BTC 0.73%) and stuff like that. I'm not a cryptocurrency guy myself as much. But it has its place, Dogecoin doesn't.

Jason Hall: It's the penny stock of crypto.

Frankel: Exactly. In options, 29% of their transaction revenue came from options trading, which to be fair, Robinhood, that's one of their big advantages over the competitors. They're the only one that I know of that doesn't charge a contract fee for options trading. Jason can probably back me up on this too. If you don't know what you're doing, there's no easier way to lose your money than options trading, maybe lottery tickets.

Hall: Yeah, I agree. It's because it's the thing where you look at the numbers and it might seem like, well, it's just a little tiny numbers here. But they're generally binary outcomes. Either you can make a little bit or you lose everything that you invest in the premium.

Frankel: I have to imagine that just knowing Robinhood's clientele, no offense to Robinhood traders, they tend to skew toward younger, more inexperienced investors. A lot of people are trading options on Robinhood's platform that who shouldn't be trading options. I think it's fair to say. If you're an options trader who's doing it the right way and knows what you're doing, you use Robinhood, great, more power to you. But that scares me as one of their main revenue drivers.

I'll let Jason chime in on this, but what would change my mind? One, I'd like to see Robinhood pivot more of its revenue to subscription products. The Robinhood Gold platform, for example, their premium offering that has a little bit of free margin, that's got some few other interesting features, generates a nice recurring revenue stream. They don't have to be as dependent on cryptocurrencies, and options, and things like that. I'd love to see them build out their subscription side of the business. I'd like them to shift a little bit more toward an investment mindset rather than a trading one.

I feel that they somewhat do their clientele a disservice by embracing the trading app thing. I think a lot of its competitors, Cash App for example, SoFi (SOFI 4.55%), which we're about to talk about, do a much better job of encouraging investment and responsible investment in the stock market. They do the commission free thing, that technology focused app, but double-down on educational resources really teach people how to invest. I'd love to see Robinhood do that. Those two things might change my thesis a little bit.

Hall: I tend to agree because right off the bat, if you think about it, I think their average user is in their early 30s, which is actually less young than you might think. But the company is clearly really laser-focused on getting younger. Their latest thing, their marketing, the push that they're having is they're doing this college tour. We're talking about this on The Five one day last week. Toby Bordelon and I were both of the same mind that it felt like, Matt, you remember this, your first day on campus and you walked past the student center area, and what do you see?

Frankel: The credit cards.

Hall: Credit cards. Hey, freshman, come get a credit card. I'm trying to figure out, is this me that's viewing this the wrong way or is it the reality? Because Robinhood, let's be honest, the younger people start investing, the better. It's like right at the heart of what we want to do. But Matt, your points are spot on that the gamification.

The thing is, I think people don't really necessarily fully understand the psychology of it. It's like the way our brains are wired. The younger we are, the more that wiring devalues risk and assumes optimal outcome. Young people do dumb stuff when it comes to money. I think we can all remember that. That's what concerns me so much is exactly the things you're saying. Because if you shift that and you think about the raw business, right now, it's about trading, it's about taxable accounts.

If you can establish strong relationships with people that are meaningful and sticky at this point in their financial life, the next 10, 20, 30, 40, 50 years, you can grow, you can add Roths, rollover, start doing advisories. All of the things people want is they travel through the cadence of their financial life. Robinhood would be greater grow with them. But I think they're doing a huge disservice because they're so focused in their incentives. As you said about the revenues where they come from, their incentives are not aligned very well with the things that should drive their business over the long-term.