Who are the Winners in a World Without Robinhood?

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The house of cards is about to collapse. Once considered the best IPO investment of 2021, it’s looking more and more like Robinhood will be lucky to survive the next twelve months. With SEC eyes on payment for order flow (PFOF) regulation, their business model is in jeopardy.

There’s no sense dancing around the issue. PFOF is the only source of revenue for Robinhood. Shut that pipeline off and they are out of business. Unlike established discount brokers like TD Ameritrade and Schwab, they currently don’t have a commission model.

On a positive note, Robinhood was able to raise an additional $2.4 billion in shareholder funding this week, with plans to possibly add another billion in debt funding to handle the one million new subscribers that signed on last week. Is it enough for them to survive?

One way or the other, say goodbye to zero commission trading. It was nice while it lasted, but all the big M&A moves have been made (Schwab-a-Trade) and the adults are now paying attention. You should too. Free trading is likely to become extinct this year.

Invest in Robinhood’s Competitors Now

Look beyond the hedge funds and the Reddit Raiders. There’s money to be made in the market for those willing to look at other trading platforms. I’m not talking about changing brokers. That’s a given. The real question is, “Who gains from Robinhood’s fall?”

Start with Charles Schwab Corp (SCHW). Robinhood did them a favor when they came on scene because they were forced to go to zero commissions to compete. TD Ameritrade followed suit and Schwab ended up snatching them up in one of the biggest M&A deals of 2020.

Schwab stock dropped from $57.83 to $51.52 last week. It peaked on January 12th at $62. Some folks might look at that as a downtrend. I’m viewing it as an opportunity. Never bet against the house. In the discount brokerage world, Schwab is the house. I’m buying.

Another player to watch is Interactive Brokers (IBKR). Their pattern is similar to Schwab, with a drop from $69.27 to a low of $59.40. They turned a corner on Friday and are in uptrend as of this writing. Their January peak was $71.01. I’m expecting they’ll surpass that.

Watch for a Betterment IPO in 2021

Robinhood may still go public, but they are likely to be mired in legislative actions and impeded by fines for the next several months. After just paying $65 million to the SEC for failure to disclose pricing details, they are an easy target for a new investigation.

The Reddit Raiders are circling the wagons, but average retail investors are ducking for cover. Betterment is a safe alternative that’s been on the IPO rumor wire for months. With Jon Stein stepping down and Sarah Levy now in the driver’s seat, expect an IPO filing soon.

In addition to Betterment, SoFi, the student loan refinancing app that has now ventured into mortgages and investing, is another fintech firm to watch in 2021. With former Goldman Sachs banker Anthony Noto now running the show, they are a good bet for an IPO filing by year’s end.

Reddit IPO Chances and Social Media Stocks to Watch

The Raiders may not like this, but their latest caper may have opened the door for a potential Reddit IPO this year. Steve Huffman, CEO and Founder, has been hinting at going public since 2017. Facebook (FB) pulled it off. Why not Reddit? Everyone knows their name now.

I can’t really recommend buying this if it happens. Huffman recently called the Raiders his “Daily List of S—heads” in an interview with CNBC. I agree with the sentiment, but I can’t really get behind a company which is that disparaging to its subscribers.

My pick for a social media stock to buy in February is Snap (SNAP). They just acquired Ariel AI, a British research lab with the technological capabilities to add 3D models of humans into smartphone views in real time. Snapchat’s 250 million daily users will eat that up.

Another social media stock to watch is Twitter (TWTR). Now that the political firestorm is dying down, they are making some intelligent moves. They just acquired Revue, an integrated newsletter app to help increase revenue for their subscribers.

What if Robinhood Survives?

This is all hypothetical of course, but I do expect Robinhood to survive in some fashion. New regulations on PFOF may force them to break their promise of “commission free, now and forever,” but they’ll at least have the government to blame for that.

Another possibility, and I’m guessing we’ll see this regardless of what happens, is the addition of more in-app purchases in the Robinhood application. They already have a “gold” subscription for $5 a month. They could easily add another level with reporting or rebalancing.

If Robinhood makes it through the storm and follows through with an IPO, I will buy in. That type of resilience deserves some reward. Of course, I’ll already be hedged by taking my own suggestions in this article. There’s no reason not to at this point.

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About the Author

Who are the Winners in a World Without Robinhood?

Kevin Flynn

A former financial professional and founder of AdvisorScale Financial Writing, Kevin lives in Leominster, Massachusetts with his wife Evelyn, two cats, and nine wonderful grandchildren.