Last week rumors swirled that cryptocurrency exchange FTX may be looking to buy Robinhood as the company’s stock price continues to tumble. Despite denials from FTX founder and CEO Sam Bankman-Fried, the idea has sparked curiosity about whether the self-directed brokerage would be acquired and who could be interested.
In a report compiled by investment bank JMP Securities on the potential sale to FTX, analysts at the Citizens Financial subsidiary suggested a low probability of the deal getting done, commensurate with public denials from Bankman-Fried, who notably purchased a 7.6% stake in Robinhood in May.
That note attributed some of the interest in Robinhood to its material drop in stock price which was priced at $38 for its IPO, hit a high of $55.01 a week later and is currently trading at $8.97. Robinhood’s total market capitalization currently stands at a mere $7.8 billion today, potentially making it an easy mark for a much larger financial firm like Morgan Stanley
JMP Securities analysts see some value in the purchase for the second-largest crypto exchange in the world with an opportunity to acquire a meaningful U.S. customer base in retail, a complement to its current business model despite some opacity because FTX is private.
From a sheer stock market valuation perspective Robinhood’s 15.9 million active accounts are now 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 about $2,500 per customer.
When presented with those numbers, JMP Securities director of financial technology research Devin Ryan acknowledged that while these Robinhood clients are currently worth less based on account balances for the average client, any buyer would be investing in the potential for these young clients to earn more and in turn deposit more on the platform as they get older.
The big question will be whether Robinhood can build out more services to retain those clients as their investing needs become more complex. Ryan also points out that the numbers at Schwab are inflated by custodial accounts for RIAs that use the platform, the type of more advanced business Robinhood could aspire to add in the future.
Despite what co-founders Vlad Tenev and Baiju Bhatt have built, Morningstar
The major wealth management players on Wall Street have been running down market over the last few years both through acquisition and in-house investment. This has come in the form of Morgan Stanley buying E-Trade in 2020, Goldman Sachs building out Marcus over the last six years and Bank of America
“The best asset is the customer base,” Columbia University economics professor R.A. Farrokhnia says, pointing to Robinhood’s millions of mostly younger customers, many of whom have a jaded view of financial services. “Larger Wall Street firms have had difficulty attracting the younger generation and the hope is that you would keep them on as customers as they grow older, and as they have more assets to invest you can monetize that relationship for a long time.”
Wong points out that with very low balances that are unlikely to transition from retail accounts to full-service financial advice accounts in any near term, the customer base from Robinhood isn’t a great fit for these major wealth management players.
Asset management firms have been interested in the robo-advice space, looking for a more direct relationship with clients that isn’t disintermediated by brokers and the aforementioned wealth managers. However, this trading happy client base that is heavy on derivatives and cryptocurrencies are not ideal for a buy and hold mutual fund world. The propensity for self-directed investing makes this pool of clients an awkward fit for asset and wealth management firms alike.
Looking at other retail brokerages, the size is just not enticing enough for the likes of Charles Schwab, according to Wong, especially after its acquisition of TD Ameritrade, which has 11 million active accounts, in late 2019. Wong says that the cost of client acquisition would be high for Schwab.
Robinhood’s tarnished reputation may also serve as a deterrent for firms wary of public, or worse regulatory, backlash. It was just over a year ago that Robinhood paid the largest-ever penalty to the Financial Industry Regulatory Authority over outages and misleading customers and just last month a Congressional report detailed failures on the firm’s part in the meme stock frenzy of last year.
One potential suitor that would make sense is a high-frequency trading firm such as Citadel Securities. Despite that synergy, this type of acquisition would likely face the highest level of scrutiny. Citadel already faces criticism for its relationship with Robinhood as a purchaser of order flow. Any deal to bring those two parties closer would not only face skepticism from the public but likely the Securities and Exchange Commission.
Perhaps the best fit, Wong surmises, would be a smaller bank with sufficient market cap to absorb Robinhood that is looking to add a retail arm or an international firm looking to gain foothold in the U.S..
Despite issues with its stock price, Robinhood boasts a customer base of 22.8 million funded accounts, net deposit growth of 30% annualized in 2022 through May and $6.2 billion of cash and equivalents on its balance sheet.
Perhaps the answer is that Robinhood doesn’t need to sell to anyone and can use its cash reserve to ride out a difficult period, something the JMP analysts see as a potentially valuable strategy as competitors in a lesser position don’t make it through.
Ryan points out that co-founders Vladimir Tenev and Baiju Bhatt still hold enough equity, with a unique class B voting shares arrangement, to control the fate of their company. The fact that they have not been proactively looking for a suitor means any purchase may come at a premium. For Ryan, it comes down to founders who still believe in the underlying ethos of “democratizing finance” under which the company was founded. He also points out that everyone has a price.
For now, he and his fellow analysts have a market outperform rating for Robinhood with a $36 price target.
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