What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing one of the hottest ipos of 2021 was the retail trading app robinhood. You might remember robinhood from the gamestop fiasco in january of 2021, where they restricted buying, but not selling of gamestop amc and several other stocks, which were popular on wall street bets at the time, regardless of their intentions. This move was widely credited with ending the massive short squeeze and saving hedge funds, who were short the stock. Despite severe backlash from the individual investor community, robin hood continued with their plans for an initial public, offering just a few months later.

Their initial ipo valuation was 38 dollars per share, giving them a market cap of 32 billion dollars. Before the ipo. We made a video explaining why a 38 billion dollar market cap made the company insanely overvalued link in the description below in the weeks following the ipo things got even crazier kathy woods started, buying shares for her arc, fintech etf, as well as her rk innovation etf. This helped to turn the sentiment positive and the stock achieved a peak valuation of almost 60 billion dollars at the peak.

Since then, the stock fell 82 percent, making it one of the worst performing stocks in kathy wood's portfolio, which is saying a lot. It now barely has a 10 billion dollar market cap to make matters even worse. Their earnings released for the fourth quarter of 2021 was a complete disaster. Their active users have declined by more than 4 million over the past six months and they reported a 400 million dollar net loss.

So what went wrong at robinhood? How did they go from? One of the most hyped ipos of 2021 to a complete disaster. This video is brought to you by manscape.com the global brand for men's grooming and hygiene products. Nanscape hooked me up with a bunch of stuff from their all-in-one performance package 4.0. So, let's check it out.

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The shed tm travel bag and the manscaped anti-chafing boxer briefs go to manscape.com today and get 20 off plus free international shipping, plus two free gifts when you use promo code wall street at checkout and now back to the video to understand robinhood. We have to first understand the retail brokerage industry in the old days. Trading of stocks was done manually by traders on the floor of an exchange. If you want to buy or sell shares, you'd have to call your broker's landline and pay many hundreds of dollars for each trade.

Unless you had at least a couple hundred thousand dollars to invest, the transaction costs were prohibitive and the vast majority of people had no way to directly participate in the stock market. As the internet developed in the 1990s, the brokerages realized that they could execute the trades electronically. So now, instead of paying an army of professional traders, they could just hire a few software engineers, despite the marginal cost of trading being almost zero. The online brokerages, such as e-trade and fidelity continued charging twenty to fifty dollars per trade, which they pretty much kept as pure profit over time.

The fees reduced, but even by 2010 e-trade was still charging upwards of ten dollars per trade in 2013, vladimir tenef and baiji bot founded robin hood. Their idea was simple, with trades, only costing a fraction of a penny to execute. There's no reason that individual investors should still have to pay five to ten dollars per trade, since it's almost free money for a brokerage to execute a trade. They had the radical idea of passing this cost saving completely onto the consumer by charging them zero commissions for stock trades.

To this end, they launched robinhood the first ever trading platform, which offered zero commission trades instead of directly charging commissions to customers. Robinhood makes money by payment for order flow. They route their customers, orders to market makers who make a few pennies on the spread and kick some of that back to robin hood. So while robin hood is technically commission free, you still lose a couple pennies of slippage that goes to the market makers.

To be fair, this is far less than the five to ten dollars that the traditional brokers used to charge and the incumbent brokers also sold their customers order flow to market makers in addition to charging the commissions, so robinhood was unambiguously good for the retail investor. When the incumbents are charging more than five dollars per trade and you're charging nothing, it's pretty easy to gain market share. In 2014, they had 40 000 customers by 2020. This had increased 300 fold to 12.5 million.

They benefited tremendously from the pandemic, as people were forced to stay home. Many of them invested their stimulus money with robin hood part of the reason for robin hood's success was their simple user interface. They made investing feel like playing a mobile game and at one point they even put confetti on the screen after you made a trade or deposited money into your account. Their popularity peaked in early 2021, but then the gamestop fiasco happened robin hood, banned buying of gamestop and amc shares at the peak of the short squeeze because they lacked the adequate capital to meet their clearinghouse requirements.

Whether it was their intention or not. The buying ban likely broke the short squeeze and sent the stock tanking. There was widespread public outcry against robin hood as they appeared to bail out the short-selling hedge funds at the expense of individual investors. People on the wall, street best forum started closing their robin hood accounts and moving to other brokerages in protests.

Surprisingly, the gamestop fiasco didn't seem to have any negative impact on their growth in the quarter following gamestop. Their monthly active users increased to a record high of 21 million and their assets under custody crossed the 100 billion mark for the first time. So while people were mad about robin hood's, disastrous handling of the event, they didn't care enough to close their accounts. It looked like vlad, had dodged a bullet, and robin hood would continue on its rapid growth path.

Robin hood ipod in july of 2021 kathy woods, saw the impressive growth numbers. They were reporting and bought. 1.3 million shares. Retail investors copied woods, trade and pumped the stock up to a 59 billion valuation at the peak.

But little did they know they were investing in this company at almost exactly the peak. In the first quarter of 2021, they reported a record 500 million dollars of revenue, but at the same time they reported 1.4 billion net loss. This net loss was the result of non-cash accounting adjustments relating to their convertible bonds. If you strip that out, they almost broke.

Even so, it was a pretty good quarter in the second quarter of 2021, which was the same quarter that they went public. They reported a record 565 million dollars of revenue. They made a 500 million net loss, but again they had a massive non-cash charge relating to the change in fair value for their convertible bonds and warrant liabilities. If you strip that out, they actually made a slight profit.

Their growth was massively benefited by the crypto offering robin hood. Crypto offers zero commission trading of cryptocurrencies, but just like with stocks, they sell your order flow to market makers who make a few dollars on each transaction, because many cryptocurrencies have large bid ask spreads. They make a killing from these transactions. In the second quarter, bitcoin reached a record high of 63 000 many robin hood users started buying bitcoin to get in on the hype.

Even more importantly, dogecoin had a massive increase in price, reaching an 82 billion market cap at the peak. This was driven in a large part by robin hood users. This drove their second quarter, crypto revenue up 44 fold year over year to 233 million dollars, which is more than they made for stocks and options combined, so robinhood became primarily a crypto app that can also trade stocks on the side. Unfortunately, all good things must come to an end during the third quarter: crypto traded sideways, not breaking out to new highs.

This caused people to lose interest in crypto and robinhood's trading volume plummeted. This caused their crypto revenue to decline by 78 percent in the fourth quarter of 2021 bitcoin increased to an all-time high of 67 000. Investors hoped that this would benefit robinhood's crypto revenue. Unfortunately, it appears that most of the benefit robin had got from crypto in the second quarter was from dogecoin, not bitcoin, dogecoin's price grinded lower on a downward trajectory.

Through the second half of the year, robinhood's crypto revenue declined quarter over quarter, despite bitcoin reaching new highs to make matters even worse. Their monthly active users declined for two consecutive quarters in a row by the fourth quarter. They only had 17.3 million monthly active users, a decrease of four million from their peak six months ago, despite their monthly active users and revenue declining their operating expenses, exploded as they gave more than 1.5 billion dollars worth of share-based compensation to their employees. That's a huge amount of dilution for a company whose market cap is now only 10 billion dollars.

Robinhood hood ipod. At the perfect time they made a ton of money from their customers trading options around the gamestop short squeeze in the first quarter. Investors naively thought they could continue this growth. They got lucky again in the second quarter with dogecoin.

However, after these two black swans passed, the sad reality came crashing down. What made robin hood unique is no longer unique. Robin hood was able to grow rapidly in the first few years of its existence because they were the pioneer of commission-free trading. Nobody else offered zero commissions, so they were effectively a monopoly, but in 2019 charles schwab finally followed suit, making its own trades commission free as well after this all of the established brokerages, including e-trade td ameritrade and fidelity quickly, followed suit.

New trading apps like rebel public, m1 finance and many others, also entered the market with zero commissions. Robin hood no longer offers anything special. The platform is very bare bones: they don't even support tax advantage accounts like roth iras, with so many commission-free brokerage options. Robinhood is now just one generic choice among many, while robinhood deserves credit for pioneering commission-free trading.

Their days of explosive user growth are now behind them. The rise and downfall of their stock is a classic tale of wall street naively extrapolating a couple good quarters and thinking that the company will grow like this forever, they pump up the sock to an insane valuation as soon as the growth disappoints. It gets crushed like a souffle under a sledgehammer, alright guys that wraps it up for this video. What do you think about robinhood? Do you think their growth can continue? Let us know in the comments section below, as always.

Thank you so much for watching and we'll see in the next one wall, street millennial signing out.