By Jason Bisnoff
Last week rumors circulated that cryptocurrency exchange FTX may be looking to buy Robinhood as its share price continues to fall.
Despite denials from FTX founder and CEO Sam Bankman-Fried, the idea has raised questions: whether the exchange is for sale and who might be interested in acquiring it.
In a report compiled by investment bank JMP Securities on the potential sale to FTX, analysts at subsidiary Citizens Financial cited a low probability of such a deal going through, similar to the public denials by Bankman-Fried, who bought a 7.6% stake in Robinhood in May, sparking rumors of a takeover.
That note attributed the interest in Robinhood in part to the drop in its stock, which was priced at $38 for its IPO, reached a high of $55.01 a week later and currently trades at $8.97.
Robinhood’s market capitalization currently stands at just $7.8 billion, which potentially makes it an easy target for a much larger financial firm like Morgan Stanley, Charles Schwab or Citadel Securities.
Analysts at JMP Securities see some value in the market for the world’s second largest cryptocurrency exchange with the opportunity to gain a significant US retail customer base, a complement to its current business model, despite any opacity because FTX is private.
Robinhood’s 15.9 million active accounts are currently valued at less than $500 per customer versus $3,600 per customer for Charles Schwab. When Morgan Stanley acquired E-Trade in 2020, the price was $13 billion which meant a value of about $2,500 per customer.
When presented with these numbers, JMP Securities’ financial technology research director Devin Ryan acknowledged that while these Robinhood clients are currently worth less based on the average client’s account balances, any acquirer would invest in the ability of these new clients to earn more and in turn deposit more into the platform as they grow.
The Big Question
The big question is whether Robinhood can develop more services to retain these customers as their investment needs become more complex. Ryan points out that Schwab’s numbers are inflated by the deposit accounts of registered investment advisors (RIAs) using the platform, the kind of more advanced services Robinhood could aspire to add in the future.
Despite what co-founders Vlad Tenev and Baiju Bhatt have created, Morningstar equity research director Michael Wong sees Robinhood as a unique company, with “not as many applications as a more typical retail intermediary” when it comes to an acquisition case. However, Wong admits there may be some buyers who see this unique positioning as a really great asset to acquire.
The big wealth management players on Wall Street have swept the market in recent years both through acquisitions and internal investments. This has been done, for example, by Morgan Stanley buying E-Trade in 2020, Goldman Sachs developing Marcus over the past six years and Bank of America investing in Merrill Edge.
Coupled with a stated desire to attract more new clients, a Robinhood acquisition could be tempting, with Jim Cramer presenting Goldman Sachs as “a good suitor” on CNBC last week.
Best Asset Is The Customer Base
“The best asset is the customer base,” says Columbia University economics professor R.A. Farrokhnia, pointing to Robinhood’s millions of mostly younger customers, many of whom have a negative view of financial services.
“The larger Wall Street firms have had a hard time attracting the younger generation, and the hope is that you keep them as customers as they get older, and as they have more assets to invest, you can leverage that relationship over a long period of time.“
Wong points out that the very low balances that are unlikely to move from retail accounts to RIAs in the short term mean that Robinhood’s client base is not a great fit for these big wealth management players.
Asset management firms have become interested in the robo-advice sector, seeking a more direct relationship with clients that is not de-mediated by brokers and the aforementioned wealth managers.
However, this trading client base that is heavily involved in derivatives and cryptocurrencies is not ideal for the world of buy-and-hold mutual funds. The trend towards self-directed investing makes this client pool a difficult case for asset and wealth management firms.
Looking at other retail brokerages, the size simply isn’t enticing enough for firms like Charles Schwab, according to Wong, especially after the acquisition of TD Ameritrade, which had 11 million active accounts, in late 2019. Wong says the cost of acquiring clients would be high for Schwab.
Robinhood’s tarnished reputation can also act as a deterrent for firms that fear public, or worse, regulatory backlash. Just over a year ago Robinhood paid the largest-ever fine to the Financial Industry Regulatory Authority for disruptions and misleading customers, and just last month a congressional report detailed the company’s failures in last year’s stock meme frenzy.
One potential suitor that would make sense is a high-frequency trading firm like Citadel Securities. Despite this synergy, this type of acquisition would likely face the highest level of scrutiny. Any deal that would bring these two parties closer together would face skepticism not only from the public but likely from the SEC as well.
Perhaps the best solution, Wong speculates, would be a smaller bank with sufficient capitalization to absorb Robinhood looking to add a retail arm or an international company looking to gain a foothold in the U.S.
Despite its share price woes, Robinhood boasts a customer base of 22.8 million funded accounts, net deposit growth of 30% year-over-year in 2022 through May, and $6.2 billion of cash and cash equivalents on its balance sheet.
Perhaps the answer is that Robinhood doesn’t need to sell itself to anyone and can use its cash reserve to get through a difficult period, which JMP analysts see as a potentially valuable strategy as competitors in worse positions fail to do so.
Ryan points out that co-founders Vladimir Tenev and Baiju Bhatt still hold a significant equity stake in Robinhood and control the fate of their company. The fact that they have not sought a suitor means that any purchase could come at a high price.
For Ryan, the point is founders should still believe in the underlying ethos of “democratizing finance” on which the company was founded. He also points out that everyone has a price.
Currently, he and his fellow analysts have a market outperform rating on Robinhood with a target price of $36.
