The influencer brokerage Robinhood's third-quarter performance fell short of expectations across the board, dropping over 16% in after-hours trading | Earnings report insights

Despite Robinhood's revenue rising for the sixth consecutive quarter, it still fell short of Wall Street expectations. Executives stated that the revenue gap was due to analysts not accounting for certain promotional income in their forecasts.

After U.S. stock market hours on October 30, the popular brokerage Robinhood announced its performance for the third quarter of 2024.

1) Key Financial Data:

EPS: The EPS for the third quarter was $0.17, while analysts expected $0.18.

Revenue: The third quarter revenue was $637 million, with analysts expecting $663.5 million. Specifically, the transaction-based revenue for the third quarter was $319 million, while analysts expected $333.2 million. The cryptocurrency revenue for the third quarter was $61 million, with analysts expecting $71.8 million. The net deposits for the third quarter were $10 billion, while analysts expected $10.67 billion. The assets under custody at the end of the third quarter grew 76% year-on-year to $152.2 billion, while analysts expected $151.27 billion.

User Count: The monthly active user count for the third quarter was 11 million, while analysts expected 12.26 million.

2) Performance Guidance:

The company expects full-year operating expenses to be between $1.68 billion and $1.96 billion, while analysts expect $1.91 billion.

After the earnings report was released, Robinhood's stock fell over 16% in after-hours trading. Prior to the Q3 earnings report, Robinhood had gained 121.4% year-to-date.

Expanding Product Line and Optimizing Investor Structure

Robinhood's Chief Financial Officer Jason Warnick explained during the third quarter earnings call that the discrepancy between Wall Street expectations and Robinhood's actual revenue was due to analysts not considering the "offset to revenue" factor when making predictions. When the company runs promotions or offers discounts, the promotional costs are recorded as "offset to revenue" rather than being directly deducted from revenue.

Specifically, to attract customers to transfer assets to the platform, Robinhood offers customers a matching reward of 1% to 3%, which resulted in a $27 million reduction in revenue for the third quarter, a factor that analysts did not adequately consider in their estimates.

Earlier this year, Robinhood launched several promotional activities aimed at attracting more customers to subscribe to their paid service, Robinhood Gold. These activities included offering physical gold cards, matching retirement account funds, and a 1% bonus on deposits. These initiatives helped Robinhood capture customers from other brokerage firms and are expected to significantly aid the company's growth in 2024 However, some of Robinhood's promotional activities have not been as effective, so they decided to stop one of the offers. Warnick stated:

"The company has decided to stop offering a 1% deposit bonus for Gold customers in November because this offer did not attract as many new customers as other promotional activities, so we decided to focus on those offers that can attract customers more effectively."

Secondly, in July this year, Robinhood acquired Pluto, a company that uses artificial intelligence for investment research. Pluto's algorithms can help provide personalized investment strategies. Robinhood hopes to use smarter tools and services to encourage users to stay on their platform longer and trade more frequently.

Robinhood wants to attract more diverse types of users. According to a report by Barron's, although Robinhood has attracted about 10% of American adults to use its trading platform, it accounts for less than 0.3% of the $65 trillion in retail assets in the U.S., indicating that the trading on the platform is primarily by small investors or entertainment funds of large investors, while significant retirement and other responsible investment funds may still be held elsewhere.

Furthermore, in October, Robinhood launched a new product called Robinhood Legend, a desktop trading platform designed for active traders, featuring a stylish interface and advanced tools to meet the needs of a changing customer base. The company also plans to launch futures and index options trading by the end of the year, and they intend to set contract fees lower than their competitors.

Additionally, earlier this week, Robinhood entered the U.S. election betting market, allowing users to bet on contracts for whether Harris or Trump will win the election. Chief Financial Officer Warnick stated:

"In the past month, we launched Robinhood Legend, our new desktop product, and index options, futures, and realized profit and loss tools are coming soon. Just this week, we launched contracts that allow betting on the outcome of the U.S. presidential election. We are gaining momentum, and this is just the beginning."