Robinhood Markets‘ (HOOD -2.96%) earnings results for the first quarter of 2022 didn’t exactly impress Wall Street. Not only did earnings and revenue miss analyst estimates for the quarter, but the company saw a drop in monthly active users (MAUs) on the platform. Investors have been skeptical of Robinhood for a while now. Is this continuing decline of MAUs something for investors to be concerned about? Let’s take a look.
Breaking down the results
Robinhood defines a monthly active user as a “unique user who makes a debit card transaction, or who transitions between two different screens on a mobile device or loads a page in a web browser while logged into their account, at any point during the relevant month. A user need not satisfy these conditions on a recurring monthly basis or have a Funded Account to be included in MAU.”
MAUs have now declined for the fourth straight quarter, although they’re still well above pre-pandemic levels, and remember, there was a huge retail trading boom fueled by Robinhood during the pandemic, which you can see peaked in the second quarter of 2021. Robinhood’s CFO Jason Warnick said, “In this market, we’re seeing customers with lower balances engaging less, which is driving the significant majority of our sequential decline in MAUs.”
I wouldn’t say it’s a huge surprise that MAUs are on the decline, considering the high levels of inflation, fading stimulus funds, more opportunities for discretionary spending with the economy recovering, and brutal market conditions that may have discouraged investors in recent months. Additionally, MAUs are still up close to double from just two years ago.
While MAUs have declined, Robinhood did manage to grow net deposits from the sequential quarter, although they are still down on a year-over-year basis. But again that was due to the boom in trading seen in the early part of 2021. Net cumulative funded accounts, which Robinhood defines as new funded accounts minus churned accounts (those that drop to zero for 45 straight days) plus resurrected accounts (churned accounts that see their accounts rise above zero), actually grew slightly and hit a new high of 22.8 million. Meanwhile, assets under custody (AUC) of $93 billion at the end of the first quarter are down from the peak seen in the second quarter of 2021 but up from $83 billion on a year-over-year basis and from $19 billion in the first quarter of 2020.
Within total AUC, equity assets, which are likely more long-term in nature, are up 5% year over year, while assets from options trading, which are higher margin for Robinhood but shorter-term, are down 45% year over year. Crypto assets are up 70% year over year. Tenev said the company has seen a correlation between AUC and revenue and thinks that the better AUC trends are due to the fact that the company has been able to deepen relationships with customers.
Should investors be worried?
I don’t want to say it’s necessarily a good thing to see MAUs down four quarters in a row, but given the elevated trading trends seen in 2021 and the difficult market conditions right now, I also don’t think investors should be totally surprised. The good news for investors is there are some more favorable trends when you look at AUC and net cumulative funded accounts. The bigger issue at hand is deepening engagement and revenue per customer. As one analyst noted on the earnings call, in the online brokerage space there is generally what is referred to as an 80-20 rule, where 20% of the accounts generate 80% of revenue.
In other words, there were and probably still are a lot of accounts on Robinhood that don’t bring much value from a revenue perspective. So, MAUs are really only good if they generate revenue for the company, and that’s what I think Robinhood needs to focus on and wants to do a better job of deepening relationships with its active users and making them more valuable from a revenue and profitability perspective.