Robinhood's Flywheel
A Compounding Marvel
What began as a controversial brokerage is quickly evolving into one of the most innovative companies within the finance space. Robinhood is demonstrating relentless execution, all while patching up previously glaring weaknesses and risks.
Company profile
Theme: Growth, Direction: Buy
Symbol: HOOD, Exchange: NASDAQ
Sector: Financial Services, Industry: Capital Markets
Fair intrinsic value: $64.71 (-1%), as of May 27, 2025
Market capitalization: $37 843 million
Pricing data: P/S 13x, P/E 27x
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This article is for informational purposes only and does not constitute investment advice or an offer to buy or sell securities.
Currently, the primary source of revenue is from user trading activity by receiving payment for order flow (PFOF) from market makers. Robinhood also offers a subscription (Robinhood Gold), unlocking new features and services. The third is interest through yield from the assets users keep on the platform.
By looking at revenue per user as well as the cost of acquiring new users, we are able to paint a picture of the sustainability of the business as well as the compounding potential. In Q4 of 2024, the average user generated $164, while it only cost $51 to acquire a new one, implying user payback within a month.
Figure 1: Robinood’s efficient unit economics, $
The investment thesis is that Robinhood continues expanding its user base through superior services and user experiences. Existing customers increasingly deposit more assets over time, which in turn boosts Robinhood’s stable revenue streams from subscriptions and interest. These stable revenues smooth outthe volatility from transaction-based revenues, which are highly cyclical depending on investors appetite for trading and investing.
Overall, Robinhood’s metrics demonstrate a powerful flywheel effect, with each segment of the business empowering the others. In addition, 90% of operating costs are fixed, which means that operating margins continue to expand significantly with scale. Robinhood exemplifies high-quality scalability by being able to combine accelerating growth with increasing profitability.
Figure 2: Average customer retention rate, %
Risks: Payment for order flow (PFOF), which is Robinhood’s primary revenue source, remains under regulatory scrutiny. It is unlikely that it will be banned, but PFOF inherently creates a ‘race to the bottom’ for market makers competing for shrinking spreads. Over time, markets become more efficient, which makes it less lucrative for market makers to offer up a lot of capital for the order flow. As an example, equities earn only a 0.01% yield, compared to 0.50% from cryptocurrencies. In time, both cryptocurrency and options markets will become more efficient, two major revenue sources. The runway is long, but it is crucial that Robinhood matures other revenue streams.
Another key risk is cyclicality, as Robinhood’s revenue currently heavily depends on trading volumes and volatility.Market direction itself is not relevant for spread opportunities, but reduced investor appetite due to bear markets can significantly lower trading activity.