Robinhood earnings result of ‘transition quarter,’ strategist says

KeyBanc Capital Markets Managing Director Josh Beck joins Yahoo Finance Live to discuss the Robinhood earnings report.

Video Transcript

ADAM SHAPIRO: Let's talk more about those Robinhood earnings and get reaction from Josh Beck. He is KeyBanc Capital Markets equity research analyst. It's good to have you here. I'm going to quote Jared Blikre, who covers the markets for us, who, when the Robinhood earnings crossed, used the word, "disaster." Now I am prone to hyperbole because I'm a journalist, and I live on hyperbole. Is it a disaster? I mean, it's clearly a disappointment, but disaster?

JOSH BECK: I think that's probably a little bit extreme. So the results did come in a little bit below the Street expectations. They were about 3% lower on revenue. If you look versus our expectations, which were a little more cautious near term, given, really, some of the turmoil that you've seen in the markets, I actually view it as a fair result. I would say the buy side would probably be closer to our numbers.

So they are in really a transition period, I would say, as a company. They really have been focused in the last year on safety first, so that's about reliability. That's about infrastructure. And now they're really kind of shifting gears more so towards product innovation. So that will be areas like crypto wallets, retirement products. So it's really a transition quarter. So that's probably more how I'd characterize things.

EMILY MCCORMICK: Taking a look at these numbers here, monthly active users down 8 and 1/2% quarter over quarter to 17.3 million. And that did also miss consensus estimates. What do you think drove this attrition that we are seeing in this churn on the platform? Is it just showing that we're past peak retail trade or activity on this particular platform? Or what factors do you think were at play?

JOSH BECK: Yeah, you know, as I mentioned, we're definitely in a bit of a evolution. So if you think about the first half of 2021, they had meme stock frenzy. We had crypto frenzy. And their growth was triple digits and very strong triple digits. So that's really what happened in the first half of the year. As you think about the fourth quarter, the environment for growth stocks, the environment for crypto really slowed down. And Robinhood is a transactional oriented business. So they felt that.

And it's not surprising if you listen to the CFO commentary from the prior call. He had messaged that he expected the user base to shrink a little bit here in Q4. So that's what happened. The growth with this company is not going to be probably quite as linear as you would see. It's much more likely to happen into waves. And right now, here in Q4 and Q1, with a pretty rough start to the year with respect to growth stocks and crypto, they're feeling that. I still think they have a great opportunity to monetize and really develop more into a super app among their 20 million users. But they are in a transition period.

ADAM SHAPIRO: Hey, Josh, let's talk about transition. There was an article in Axios-- and this is just speculation, so it's worth the air I'm breathing and that's it-- about potential target for takeover. And now I want to refer to an article in Bloomberg from May 21st when Apollo Global Management bought us, Yahoo Finance. And the lead on that deal said, we are looking at a wide range of business and product initiatives that can leverage the scale of Yahoo Finance.

In that same paragraph, May 21st Bloomberg article, it talks about Yahoo Finance having perhaps stock trading or investment services. Would it make sense for the world's largest financial platform, Yahoo Finance, to team up with a Robinhood if Axios is right, and you realize it's all speculation that they're a target for something?

JOSH BECK: So you're right. I think there's a little bit of speculation on top of speculation there. So yeah, you know, what I would say is just stepping back on this space, is, there's really going to probably be, according to our survey work, about a half a dozen or so of these fin apps that really gain scale. Robinhood, around 20 million users. Venmo, 80 million. Cash App, less disclosure, 40 million. So they're right up there with the scaled platforms.

And that's a really hard barrier to break through. So I think they've created a lot of value with its user base. And strategically, I think there's lots of ways you can optimize it. Certainly, they're making a very good push organically. And I think that's the plan for now. Could that change if something strategically came up interesting? Perhaps. I think it's a little early in the lifecycle of this industry, just given the growth rates. But it's something to watch in the year ahead, given the large reset that we've seen across so many tech valuations.

EMILY MCCORMICK: Do you see a path to sustained profitability for Robinhood? And if so, where's that going to come from and when?

JOSH BECK: Yeah, this is a good question. This has been one that has really risen in investors' minds as we've adjusted to this new rates environment. And I think if you were to look at Robinhood, they actually score fairly well. Now 2020 was a very unusual year, and it's not a year that you can say is perfectly representative of the future. However, they did get to mid-teens profitability on the EBITDA basis. And so that's actually quite good. There's many startups that are growing at this type of level that would be far negative in the 10%, 20%, 30% range.

So they actually have a very strong proof point of established profitability. I don't think you're going to see that in 2022. I think as I go back to my theme on them transitioning from a fin app to a super app, where they have multiple services, they need to invest to do that. So I don't think you will see it this year. But if you look back the last couple of years as a lens of what they can do, they actually score really well on that dimension.