Robinhood’s “Oops Moment”: Wall Street Analysts’ Snafu Sinks Stock by 11%

Robinhood (HOOD.O) just had one of those “oops” moments Wall Street analysts didn’t quite see coming—and their stock price got taken on a rollercoaster ride. We’re talking an 11% drop. Why? Because analysts missed a simple accounting twist, and Robinhood ended up missing earnings expectations for Q3. Let’s peel back the layers of this financial onion, and hey, it’s bound to bring a few tears—just like every good financial analysis should.

Contra Revenue: The Fancy Name for Analyst Slip-Ups

Imagine you’re all set to count your money only to realize there’s a whole pot missing. Robinhood’s Chief Financial Officer Jason Warnick is pointing fingers at analysts for doing just that—they missed out on calculating what’s known as “contra revenue.” And no, it’s not a character from a retro video game. This, my friends, is the amount Robinhood pays back to clients in incentives.

Robinhood decided to roll out some sweet promotions for users—like 1% to 3% matches to incentivize customers to shift their funds over. Great for the users, right? But all that free cash needs to be accounted for, and these incentive payments ended up reducing Robinhood’s revenue by $27 million. And apparently, nobody thought to double-check how much of Robinhood’s cash was waving goodbye.

Warnick casually dropped that contra revenue actually rose $14 million from the previous quarter—an oversight that analysts just didn’t quite factor in. In fairness, analysts might need a flowchart these days just to figure out what’s going on with all these contra-this and boost-that mechanisms in play. And the fun doesn’t stop there; it’s expected to rise sequentially next quarter. Spoiler alert: More of the same bumpy ride ahead, Robinhooders.

The Gold Boost Gone Bust (Almost)

There’s also Robinhood’s 1% Gold Deposit Boost. You know, like a gold star for users—except it’s actual money. Only, much like that gym membership you totally meant to cancel, these little boosts can add up quickly. CFO Warnick assured investors this whole gold booster will be winding down in November—so maybe analysts won’t have to sweat quite so much next earnings season.

This “golden” idea seemed designed to drive customer loyalty, but in the process, it’s also been driving down net deposits and beefing up contra revenue. It’s one of those “good news, bad news” stories that’s left investors scrambling to adjust.

Trading Volumes Surge: Crypto Bros Rejoice!

Meanwhile, while the CFO explained the rabbit hole of accounting, Robinhood traders had a different idea—trade, trade, and trade some more. Retail investors decided to kick it into high gear with increased trading volumes amid volatile market conditions. Bitcoin and U.S. stock highs definitely got everyone excited—because what could be better than riding market highs except, of course, trying to time them perfectly (spoiler: most people can’t).

Crypto trading surged—112% this quarter, which is something that makes one wonder how many people missed that warning about volatility, or just thought “Hey, why not?” Throw in a 65% increase in equity trades and a 47% rise in options contracts traded, and it’s pretty clear that everyone thought the “fast and furious” strategy still had gas in the tank.

Where Are the Deposits Going?

Robinhood’s net deposits fell to $10 billion from $13.2 billion. A 24% drop—which is, you know, a tad inconvenient if you’re trying to convince people you’re all about profitable growth. Michael Ashley Schulman, Chief Investment Officer over at Running Point Capital, piped in to point out that these declining deposits might squeeze the margins. Sharp observation, Michael. If people keep taking out money, Robinhood might have to rename itself Robbing-Hood.

The trading platform saw its Q3 transaction-based revenue soar by 72% to $319 million, driven by crypto and options. It’s like everyone was celebrating Halloween early by just piling into whatever scared them the most. Scared money doesn’t make money, but Robinhood’s transaction-based revenue did—at least until the incentive accounting took a bite.

What’s Next for Robinhood?

So, what’s next for our favorite disruptor of Wall Street’s status quo? Robinhood added futures and index options to its mobile app and rolled out a desktop platform for those who prefer a big screen for big trades. It seems they’re still eager to cater not just to first-time retail traders but to more seasoned, bigger-budget investors who are into deep-diving futures contracts. You know, for those traders who don’t need sleep.

Robinhood’s focus on profitable growth still seems to be intact for 2024—even if they missed by a penny this quarter (profits came in at 17 cents per share, missing expectations of 18 cents). What’s a penny between friends, right? But to Wall Street, every cent is sacred.

Analysts, Check Your Homework

What can traders learn from this stumble? Always check the fine print—whether it’s about incentive accounting or interpreting where revenue growth is actually coming from. Analysts and investors alike could do with a little more scrutiny. Sometimes, incentives look like free money, but nothing in finance ever truly comes without a string attached—or in this case, a contra revenue clause waiting to catch you off-guard.

Robinhood’s current mood? Probably somewhere between “Hey, we grew revenue!” and “Why doesn’t anyone read the footnotes?” The moral of the story? Always factor in contra revenue, and if you’re an analyst—maybe double-check next time before Wall Street hits the sell button.

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Source Inspiration: Reuters
Image Credits: Cover image at the top is AI-generated