The commission-free trading app that became all the rage during the early days of the pandemic, when bored people turned to stock trading for entertainment, has almost certainly been heard of by you. Many of the so-called meme stocks seem to be favorites of new investors.
It is likely that you are less familiar with Sofi Technologies, despite its broader range of app-based offerings.
Don't confuse sustainable success with notoriety. A lot of companies are better at creating attention. SoFi is a good bet for investors looking to add some growth prospects to their portfolio.
The two companies look the same. The Cash Card will help customers easily access their money in their account, though it is focused on stock trading. SoFi Technologies offers a mix of loans and banking services as well as online investing, and in the same vein as Robinhood, ultimately aims to send people to the company's app. Anything one of these companies does could be copied by the other.
These two organizations are vastly different in many ways.
The image is from the same source.
The disparity is due to how each of these two outfits sparked their early growth. At its launch in 2011, SoFi was solely a lender, cashing in on the peer-to-peer lending craze. Since then, it has added banking, credit cards, and investing, but it still remains a lender, adhering to all the rules and standards that apply to the industry.
The history of the company is different. It was launched as a commission-free stock trading app. Stock trading is still the focus, even though features like the Cash Card are added. It was a hit during the earliest phase of the Pandemic because it gave people an activity they wanted to do.
That little detail has evolved into a bigger problem for the app than it could have expected.
There is still a cost for investors even though Robinhood does not charge investors commission on stock trades.
Payment for order flow is the main source of revenue for Robinhood Markets. The company collected more than a billion dollars of this transaction-based revenue last year, nearly doubling 2020.
At least not yet. The idea is under scrutiny. Legislative efforts to prevent the SEC from making a ruling on payment for order flow have countered the SEC's consideration of banning the practice. It is not always clear whether the model presents a conflict of interest and whether consumers are harmed or helped by the commission-free trading business model.
Even if payment for order flow is not banned, change is likely to pose a threat to the core business of the company.
Prospective rule changes could present problems for Robinhood. Many of the clients it has attracted since its inception might be the most sensitive to any rule changes or trading commission imposed.
The average account balance for a first-time investor is between $4,000 and $5,000, although the median account is likely to be much smaller. Many of these investors only opened accounts during the throes of the Pandemic to replace time usually spent, so they may well lose interest in stocks at the slightest of cost increases.
They may be losing interest. Even if the company&s revenue grows again next year, it will still take years to make profits, according to analysts. This week, after rapid expansion, Robinhood announced a 9% reduction in staff. The company was fined $70 million last year for systemic supervisory failures that led to customers being given false or misleading information.
Data source: Thomson. The chart is by an author. The figures are in millions of dollars.
Read between the lines. It is difficult to start a business. It is even more difficult for a new investor with small accounts.
There is no suggestion that Robinhood Markets is beyond redemption, as a broker or as an investment. There may be even bigger challenges in place than the headlines suggest.
SoFi Technologies isn't facing the same problem. The lending business isn't facing sweeping rules changes and isn't fighting just to keep consumers attention.
While it is still in the red, the progress toward profitability is steady. Analysts believe that it will be in the black by the year 2024, and there is no reason to doubt their projections.
Data source: Thomson. The chart is by an author. The figures are in millions of dollars.
What is the bottom line? Don't make this complicated. The future of Robinhood is questionable at best. There is much to be said for certainty when it comes to supporting a stock's price. It is not a great first position for a new portfolio, but it is a good addition to a diversified portfolio that already has some defensive, lower-risk holdings.
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