$HOOD: The Green Meme Stock Who Could
It's Literally Free Money
As a preface, I do have a CDLX article I would like to write soon. Most of what is to be said I’ve said on Twitter as you may have seen. The short version is that AmEx probably starts happening Q4/Q1 and contributes something similar to Chase. I view it as a double minimum in 12-18 months if my assumptions around that deal are true. More on that at a later date!
I write to you today with the intent of sharing some details on a business both from the lens of it’s competitive impact and investment case, as well as how ridiculously profitable it is to be a consumer! As a result, I have a shameless plug wherein you can support me by giving yourself free money. In exchange for using my referral I would get a solid gold credit card which is tacky in a way I would quite enjoy, and you would get the most sweetheart brokerage transfer deal you’ve ever imagined. Let’s dig in.
https://robinhood.com/creditcard?referral_code=da17be16
A Deal So Good It Feels Like Stealing
First off we can get to the point of the deal. Currently Robinhood is running a slew of promotions related to their premium Robinhood Gold Membership. The list of benefits includes:
$1,000 of Margin at a 0% rate
5.25% APR on uninvested Cash
3% IRA contribution match
8% Margin Rate
1% Bonus to Any Deposit - Coming Soon
3% Cash Back Any Category Credit Card - Comin Soon
3% Match to IRA transfers
Total cost? $5 per month. Yes, $5 per month.
Let’s break that down:
$1,000 of free margin can be put into SGOV for a risk free ~$50/y pre-tax.
5.25% APR on uninvested cash is one of the best I am aware of.
3% IRA contribution match is worth up to $210/y as of 2024.
8% Margin Rate lets college kids have a lower rate than people with millions in assets.
1% Bonus to Any Deposit assuming say $20k saved per year is $200/y for free.
3% Cash Back any category is quite impressive. Currently the highest I am aware of is 2% for all category, so quite the difference. Better deals are obviously available depending on category, but for someone like me who prefers 1-2 cards, it’s quite compelling and could save an additional $200+ per year.
3% Match to IRA Transfers - This is a deal so good everyone I tell about it doesn’t believe it’s real. As of now I have transferred my own IRA, my mom’s IRA, my dad’s IRA, a couple friends IRA’s, etc, The total rewards are >$100k of essentially free money for the low cost of $5/month.
Overall? Total recurring benefits in the range of ~$500 per year minimum with a 3% IRA transfer match vs a $60 per year investment. A no brainer, so what’s the catch?
These rewards all have their own specific terms so I’ll try to outline the general idea and specifics on the 3% match.
For these bonuses they are all as mentioned tied to Robinhood’s optional premium membership Robinhood Gold. Bonuses such as free margin and 5.25% APR are simply as they read. All of the bonus contributions however typically have a term structure that looks something like the following.
“Requires X months of gold membership and Y years of not withdrawing or the bonus is clawed back”.
For the IRA the basic terms are that you must be a gold member for 1 year after the transfer and hold the funds without withdrawal for 5 years. Full terms here if you want to verify. Also, the transfer has to settle by the end of April, so get cracking!
That really is the only catch, pay $60 in membership fees (that pay for themselves regardless) and don’t withdraw for 5 years. The only additional downside is that your account is now on Robinhood with Robinhood features instead of your normal brokerage. Issues such as not being able to sell specific lots for tax purposes and the like make it hard to justify for a core brokerage, but given many IRA’s are more set and forget (as well as being non-taxable), any limitations with regard to the platform are quite minimal. The only tangible return downside I can think of is if you have a sweetheart share lending deal at another brokerage as I believe Robinhood pays a lower share to users. This of course is not particularly relevant for most holdings, but consider your own trading activities of course.
So yes, the main purpose of this article is highlighting the fact that you can probably get thousands or tens of thousands of dollars while actually being paid to do so. The transfer request takes about 5 minutes and account creation takes about 10-15. Being compensated >$100k per hour for some of the transfers I’ve set up is quite amusing.
Which is also why I shamelessly plugged my own referral link earlier and will do so one last time here. You can also feel free to DM as usual on Twitter with any questions and read the terms agreement linked above.
https://robinhood.com/creditcard?referral_code=da17be16
It just looks pretty alright?
Anyways, we can now move beyond the free money portion of the article to some more interesting market commentary.
Robinhood, the Equalizer
What I find exceptionally interesting about this strategy are the implications. The current offering set from Robinhood represents a step-change increase in their user benefits for a platform that already pioneered commission free trading and a 3% IRA contribution match, as well as best in industry margin rates. The addition of a generic deposit bonus and the ability to sell lots (coming later this year I believe) may justify me having a larger share of my taxable PA within the platform in addition to my pending IRA transfer. The goal here seems quite obvious, pay out the nose for market share.
As I’ve said before I generally find it intriguing when intrinsic value of a company is volatile, not just the stock price. In this case, Robinhood is going about what is effectively a transformational move in their benefits program which will impact their intrinsic value, as well as everyone else in the industry, across brokerages, HYSA’s, and credit cards.
For example, anyone with an IRA is leaving money on the table not transferring to Robinhood right now. In theory if the market was fully efficient, Robinhood would capture 100% of American IRA assets by the end of April. That is of course not going to happen since many don’t care or can’t be bothered, but over time it creates a significant attraction of retirement account capital from generally rational consumers. Fidelity and IBKR are great, I use them both, but why should I keep an IRA on either platform? (unless I enjoy putting my IRA in international shitco’s vs domestic). For general users allocating to Mag-7 and ETF’s, it’s a no brainer. The natural equilibrium seems to be either that Robinhood wastes a bunch of money, or brokerage benefits increase over the coming years to achieve parity.
The credit card space is equally as interesting. With interchange fees under pressure, the rise of alternative cards is quite notable. Amazon with their whopping 5% cashback Prime card is a steal for individuals like my dear mother who is simply an addict. A 3% back general use card from Robinhood would simply save me an additional 1.5% in most categories since I’m too lazy to juggle a bunch of card categories in my head (as well as being solid gold if you click my referral link, which is fun). As you may obviously know as well a majority of my net worth is invested into CDLX which should only benefit in theory from these types of activities. Chase and American Express seem to be investing heavily into their offers program as a 5-15% cashback merchant funded offer is drastically better for both consumers and the banks than using their interchange fee to give 1.5-2% back. The writing on the wall implies a very interesting development in the credit card space over the coming years, and change is always conducive to investing returns (whether positively or negatively is less clear).
Additionally Robinhood is offering a sweetheart HYSA equivalent with their cash sweep program. I’ve personally never been one to have anything besides a checking and brokerage account. For whatever reason if I have extra cash I can let it sit and get paid a quite competitive rate instead of jumping through hoops on a HYSA with withdrawal limits and the like.
The natural question of course is “How the fuck are they funding giving me thousands of dollars for free”. A very valid point, and why I’m generally skeptical of HOOD as a direct investment currently. While the business model is clearly obscenely beneficial for consumers, the value accrual at HOOD depends upon what kind of client base redeems their offers. The typical Robinhood client has a few thousand in their account and is largely profitable through PFOF. The average assets per customer is legitimately $5,042, so 1% deposit matches or 3% IRA matches don’t add up to much vs the culturally high transaction volume. Robinhood sees nearly $90b of monthly trading volume vs an AUC of $118b, so a typical user is turning over almost their entire account each month. A great way to sell PFOF! The company clearly want’s to diversify a bit given potential legal issues with PFOF in the future, so leaning into Gold and attracting higher value customers is a natural move. The company is sitting on a touch under $7b of net cash, so a bit of burn to change up the profile is perhaps prudent for long term health, but maybe not investor success in the short term.
Overall, Robinhood is clearly changing up the game for the brokerage and fintech space with these types of offers, as well as a general movement across the board in areas like credit cards. I’d guess we’re still early days in a transition, but it seems likely the current regime may look a bit different in 5-10 years in regards to card holder benefits and brokerage benefits.
As an investment, I will be exceptionally curious if the Robinhood narrative falters over the coming years. I owned a small position early last year which I subsequently sold towards the end of the year. The high cash balance makes it tough for the share price to move dramatically as to some extent last year it was a treasury bond+business call option given the majority of the EV was net cash. They have a whopping 23.6 million funded accounts which is multiples more than the likes of IBKR despite IBKR being 3x the market cap. If Robinhood can retain their young audience and continue landing capital, the AUC and thus earnings power should in theory scale quite well over time. With a 1% deposit match and 3% IRA match there is little reason to go else where as a young professional looking to slowly invest in a brokerage account. Time will of course tell if that’s how things actually go, or competition steps up dramatically in the future.
Cheers and hopefully this article was helpful.