Robinhood once terrified Wall Street. But now the stock is down 73% and layoffs have hit morale. Will the next chapter be a takeover or a turnaround story?

It was July 29, 2021—IPO day. The California brokerage that had upended how people buy and sell stocks had just faced an 18-month-long flood of new investors piling into the financial markets, and, finally, it was getting ready to debut its own stock after years of wavering on whether and when to do so.

Robinhood had built its business for a new generation of investors, and, for that, it exploded in popularity during the height of the pandemic. In the year leading up to March 31, 2021, total net funded accounts had grown 151% to 18 million at Robinhood, assets under custody jumped 321% to $80.9 billion, and total net revenues spiked 309% to $522.2 million.

Not everything over the past few years had gone smoothly, to be sure. There were outages, regulators began circling over concerns about gamification, and, of course, there were the meme-stock events of January 2021, when a gaggle of Reddit-loving day traders bid up the stocks of companies like GameStop and AMC Entertainment so aggressively that Robinhood (along with others in the industry) was forced to suspend buy orders for long stretches. An emergency fundraise, a Congressional hearing, and a slew of lawsuits followed soon after.

Still, the IPO reignited a buzz around the company. So, with Robinhood officially wading into the public markets, individual and institutional investors—from WallStreetbets to Wall Street itself—were sure to take a look at putting their money into what many industry analysts have long posited could be the next great brokerage.

The excitement is all but gone today.

One year later, while brokerages of all breeds are dealing with a series of blows from the worsening macroeconomic conditions in the U.S., Robinhood appears to be bruised worse than most. Usage dropped off in the first quarter by 10% year over year. In April, Robinhood laid off 9% of its full-time employees, realizing that the company’s pandemic-induced hypergrowth had led to “some duplicate roles and job functions, and more layers and complexity than are optimal,” CEO Vlad Tenev wrote in a blog post. The stock has plunged over the past year, with shares down 73% from the close on the first day of trading. And speculation that the company may be ripe to become a takeover target has begun swirling.

Robinhood executives have talked for years about plans to diversify the brokerage’s business and to become more than just an app on people’s phones where they buy DOGE, GME, and TSLA. But the need for Robinhood to become Robinhood 2.0—a financial supermarket of sorts that’s built to grow with the company’s younger customer base—has become just that much more apparent of late.

“No firm starts with a comprehensive offering,” Robinhood chief brokerage officer Steve Quirk tells Fortune. “Robinhood was known as a place where you transacted in equities early, then options were added, but, in order to be able to grow with this customer base, you have to give them the other things that they’re going to need.”

With 22.8 million funded accounts now on its platform—a more than 300% increase from late 2019—Robinhood has already begun rolling out a suite of new products and services to fulfill its vision. Some within the world of crypto. Others linked to more traditional brokerage offerings like stock lending.

But turning a profit on accounts that have just a few thousand dollars in each is no simple feat, industry executives say. Nor is expanding overseas. It doesn't help that just about every other financial technology upstart is pursuing a similar vision for their apps. Plenty on Wall Street have already concluded that Robinhood is bound to eventually become part of a larger entity—whether that be Sam Bankman-Fried's crypto exchange FTX, investment banking giant Goldman Sachs, or something else. Now the question is whether Robinhood has enough time left on the clock to build out its own ambitious plans before vultures start circling in earnest or if the company has already missed its window to become the next great brokerage on its own.

'It took off like a rocket'

Launched publicly in 2015 with the tagline of democratizing finance, Robinhood's rise in the brokerage business may very well become the stuff of Wall Street folklore one day. The company, founded by Tenev and fellow Stanford graduate Baiju Bhatt, was a maverick from the get-go. It offered investors a new type of brokerage for the Internet age—one that made it simple to open an account from the app, for instance. The design was sleek, featuring understandable charts and sometimes flashy graphics. Compared to the convoluted and clunky platforms that the incumbents were offering customers in the App Store, it was even a bit sexy.

Eugene Gologursky—Getty Images for Robinhood

And it was, of course, free of account minimums and commissions, which, at a time when legacy brokerages were charging upwards of $9.99 per trade, made it all that much more attractive.

"Obviously it took off like a rocket," says Mark Casey, the founder and CEO of Apcela who first met Tenev and Bhatt around 2009 when the duo were trying to stand up a high frequency trading technology called Chronos Research, of Robinhood. "They picked away at the underbelly of the market that nobody cared about, got to scale, and now everybody cares."

The company was not the first to offer commission-free trading. Another startup called Zecco had tried to do something similar years earlier, but ultimately failed to gain much traction at the time. Incumbents like TD Ameritrade had toyed with the notion before, too, says Quirk, who previously worked at the brokerage. But the company, now owned by Charles Schwab, was never confident it would be able to pull off the growth needed to offset the cut in commissions, Quirk says.

Robinhood was.

Instead of commissions, the upstart brokerage would come to rely (and still does) on a long-used system known as payment for order flow, where brokerages charge speedy Wall Street trading firms with names like Susquehanna and Virtu and Citadel Securities to execute client orders. In return, Robinhood was able to justify not charging customers any explicit trading fees. 

Soon, just about everyone seemed to have heard of Robinhood.

"Their account growth within the first six months was not something that we had seen before," says Bill Capuzzi, CEO of Apex Fintech Solutions, which cleared trades for Robinhood for years after it first launched. "They had amazing growth without having to spend the crazy client acquisition costs of today. And that, in and of itself, tells you [they] were onto something."

By the end of 2015, Robinhood had 300,000 net cumulative funded accounts. The next year? 700,000. And it didn't stop there. Five years after launching the app, Robinhood had 12.5 million funded accounts. The venture capital funding came in heavy, too—eventually. Two years after the app went live, Robinhood reached unicorn status with a $110 million Series C. "It went beyond our expectations once it got to a billion," Social Leverage general partner Howard Lindzon, who founded Stockwits and invested in Robinhood's seed series, tells Fortune.

When COVID-19 hit at the start of 2020, Robinhood was on top of the moon. Months earlier, after years of mounting pressure from frustrated customers who had grown tired of commission fees, the rest of the brokerage industry followed Robinhood's lead and went to zero, kicking off a series of acquisitions that saw Schwab gobble up TD Ameritrade and Morgan Stanley add E*TRADE to its corporate umbrella. And even though commissions were officially a thing of the past, Robinhood still seemed to have a leg up over the competition with its built-in appeal to the masses—setting it up to become the go-to app for the droves of retail investors who would pile into the market over the next two years, whether it be out of boredom, a fascination with meme stocks, or an actual interest in investing for the long run.

Even the Quirk family couldn't resist its allure. While Quirk was still working at TD Ameritrade, the one-time Chicago pit trader had managed to convince his three daughters to set up brokerage accounts. So, when they asked for some help in getting started, Quirk was happy to oblige. Until he saw their brokerage accounts. On Robinhood. "And I'm like, 'What the fuck?'" Quirk recalls saying. His daughters promptly responded that they wanted to invest their own way. "And I appreciate that," Quirk adds.

Quirk eventually joined Robinhood himself, coming on as chief brokerage officer in January. Now he along with the rest of the Robinhood C-suite face a conundrum that has long befuddled brokerages—as well as startups more broadly—that built their business doing one thing: How do we grow along with our customers?

A hard road to diversification

Robinhood is today still largely the same retail trading app that it was way back in 2015.

And therein lies the issue.

In the brokerage business, volatility will always be a factor—in both shaping a company's results and the results themselves. Is the market heading up and to the right? Investors are buying then, which spells good news for companies—the brokerages, the market makers, the exchanges, and so on—that are intertwined in the labyrinth of a process behind executing a trade. But the effects become more obvious the more reliant a company is on trading revenues.

Currently, Robinhood brings in the vast majority of its revenues from order flow payments.

Transaction-based revenues accounted for 73% of the total money brought in the door in the first quarter. Of that, more than half stemmed from options trades done by the brokerage's clients. Cryptocurrencies represented 25% of the transaction-based revenues, while equities were about 17%.

So, when everything from meme stocks to the largest exchange-traded fund to cryptocurrencies are on the rise, a business like Robinhood's swells. Over the course of the pandemic, the company's total net revenues exploded, going from $72 million in the fourth quarter of 2019 to a peak of $565 million in the second quarter of last year. And surely enough, the opposite is true as well. Since then, as U.S. equities have corrected, crypto has sold off, and the retail investing retreat has commenced, Robinhood saw its revenues slide down to $299 million in the first quarter.

"The pendulum swung way too far out positively in the beginning of 2021, and I'd argue we've swung too far out the other way," JMP Securities analyst Devin Ryan says. "This isn't a normal environment."

Robinhood has been working to stabilize its revenue streams for years now.

For instance, in 2016, Robinhood introduced its subscription platform, Robinhood Gold, which offers a more sophisticated trading experience than the basic one for a monthly subscription fee of what is today $5. Bhatt, the company's cofounder compared it to what Amazon Prime is to Amazon at the time.

How much the Gold subscription payments help is not clear, though. Robinhood tucks the payments within its broader "other revenues" category that accounted for 8.7% of revenues in the first quarter. The subscription offering does offer the company another source of revenue in margin interest as well, and that represented 11.7% of Robinhood's overall revenues in the first quarter—making it the company's fourth-largest source of revenue.

Even as the IPO happened in 2021, Tenev spoke of a vision for Robinhood to become "the most trusted and most culturally relevant money app worldwide."

"Anytime you receive a paycheck direct deposit, we'd like you to do that through Robinhood. Your emergency fund, your bill pay, your day-to-day spending, we'd like for customers to use us for that," Tenev told the Associated Press at the time. "And of course, all types of investing ranging from more discretionary investing to long-term retirement savings as well."

With a reach that is bigger than ever today, Robinhood's push to expand needs to go further now, though.

"One of the hardest things to do is gather eyeballs and get new investors—and they've done that in spades," says Larry Tabb, head of market structure research at Bloomberg Intelligence. "The challenge is how do you migrate those investors from an economically challenging business model to a pure profit model?"

The company has already started to do as much within the vast and often-tumultuous world that is crypto. That's because Robinhood sees digital assets as a way to expand internationally, says Quirk, who added that about 60% of accounts at Robinhood have traded crypto. So, in April, Robinhood inked a deal to acquire U.K.-based cryptoasset firm Ziglu, added a handful of new crypto tokens onto its platform—raising its total count to 13—and rolled out its long-awaited crypto wallet. Soon after, the company unveiled that it was working on a new non-custodial, Web3 wallet, too.

Beyond crypto, Robinhood has also begun to build out more traditional offerings, like retirement accounts and securities lending. In March, Robinhood introduced a new debit card. And the company has also been working on adding new layers of services and capabilities in its core business of trading, like 24/7 equities investing.

"The velocity of all the things we're working on and that are coming out has never been better," Quirk says. "We're in a good stride right now. The market hasn't been great, but we're going to continue with that cadence and hopefully build out a wonderful offering that's going to keep people here and attract a lot more."

Whether it'll be enough remains to be seen.

Wall Street whispers of deals

Ask Thomas Peterffy, the billionaire founder and chairman of Interactive Brokers, and the answer is a flat no. "I do not think they'll be able to turn a profit as long as they are on their own," Peterffy says. "They would have to merge with another entity that can offer more services to these account holders."

"They're a one-trick pony," one executive in the industry who asked not to be named talking about a competitor said. "Consolidation is definitely going to happen. Now whether or not Robinhood is on the front side or the back of that is going to play out over the next 12 to 18 months."

Any deal would likely need to come in at a significant premium, JMP's Ryan says. Tenev and Bhatt do have a controlling share of the company's voting rights, after all. But there are indications that interest is on the rise. FTX, the crypto exchange, has reportedly been holding internal conversations about mounting a bid to acquire the company. Its CEO, Bankman-Fried, is the fourth-largest shareholder in Robinhood, as of July 19, according to S&P Global Market Intelligence data. "We are excited about Robinhood's business prospects and potential ways we could partner with them, and I have always been impressed by the business that Vlad and his team have built," Bankman-Fried said in a statement when the news first broke. "That being said there are no active M&A conversations with Robinhood."

An FTX spokesperson declined to provide further comment.

Its balance sheet is stacked with more than $6 billion in cash and cash equivalents—and many like Ryan still do see Robinhood as the brokerage of the future. "They are just scratching the surface," the JMP analyst says. "It's too early to say whether they've been successful or not because we're just in the early stages of this evolution."

Within the company, however, some employees appear on edge. A quick look at the anonymous career app Blind—think GlassDoor requiring employees verify that they work at the company before reviewing it—shows that employees have grown concerned about the amount of people leaving, the stock's collapse, and the general rollercoaster ride the company's been on over the last few years.

"You've got a ton of hard working people here," someone posted in July, "but the [morale] is dead."

Quirk agrees in the sense that in a market like today's "it's unnerving."

For the Robinhood executive, who started his career the week of the crash of 1987, market crashes are old news. But many employees at the brokerage are of the same age as its customers, he says—meaning few have ever experienced a downturn on this scale before in their professional lives. In the meantime, Quirk advises that investors, employees, whoever it may be adopt the crypto mantra of keep building through winter. Because one thing is certain: Even though the pandemic may not be over yet, the trading heyday that came with it and helped build Robinhood into a colossus over the last two years is.

"We're not getting stimulus checks sitting at home all day looking for something to do anymore," Alphacution Research Conservatory director of research Paul Rowady tells Fortune. "We're back to school. We're back to work. We don't really have the luxury of staring into our phones all day trading Tesla."