Robinhood Markets (NASDAQ: HOOD) has added new users at a high rate over the past few years. For the second quarter, net cumulative funded accounts more than doubled to $ 22.5 million year-over-year. But the online trading platform could face increasing competition from PayPal funds (NASDAQ: PYPL), which has just launched a new version of its digital app, with shopping tools, bill payment and financial services, in addition to cryptocurrency trading.
Here’s a look at what PayPal has to offer and why it could steal the thunder from Robinhood.
PayPal creates the ultimate financial services app
Currently, PayPal and Robinhood are two different apps, serving two different customer groups. The PayPal app is all about day-to-day cash management, where you can pay bills, send money to friends, and browse deals from major retailers. Robinhood primarily focuses on serving long term investors, traders, and cryptocurrency investors. In the second quarter, Robinhood saw for the first time a greater share of new clients trading cryptocurrencies rather than stocks.
But make no mistake, the two companies are on a collision course targeting the same market. Robinhood already offers basic cash management features, such as a debit card and the ability to pay bills and receive direct deposits. This is a sign of the direction these free trading apps and digital wallets are taking. Juniper Research estimates that the number of people using digital wallets will double to 4.4 billion by 2025. Over time, many people will likely gravitate towards a “super” app that does it all: peer-to-peer payments, shopping, payment of bills. , and invest.
The problem for Robinhood is that PayPal already has a massive installed base of users to easily promote the financial services features of its own app. PayPal finished the second quarter with 403 million active accounts, along with 32 million merchant accounts, which is well ahead of Robinhood’s 22.5 million. As PayPal continues to roll out new features on its app that mirror what these stock trading apps do, Robinhood may have a steep rise on its hands. Robinhood’s recent momentum stems from the increase in the number of people trading cryptocurrency, but PayPal is one of the few apps that allows users to shop at major retail brands with their balance of cryptocurrency.
Additionally, PayPal has announced plans to launch new investment capabilities on its app in the coming quarters, as well as a high yield savings account option via Synchrony Financial. PayPal’s ability to combine all of these features, allowing users to use their money seamlessly to trade cryptocurrencies, buy stocks, and take advantage of promotional retail offers in one app, might be too difficult. to be matched for Robinhood in the long run.
Too much uncertainty in Robinhood’s future
Robinhood still has a few ways to differentiate itself. It starts rolling out 24/7 phone support and prioritizes investing in educational content. Robinhood also introduced IPO Access earlier this year, allowing users to invest in newly listed companies at their IPO prices. It is not clear whether PayPal’s new investment offering will be as robust as Robinhood’s app or will be a streamlined stock trading interface like Square‘s Cash App.
However, nothing prevents PayPal from potentially offering some of the same features as Robinhood. After all, PayPal has a lot of money to reinvest in new features. In the past year, it generated $ 4.8 billion in profits, while Robinhood reported half a billion in net losses in the second quarter.
Beyond the looming threat from PayPal, the new regulations by the Securities and Exchange Commission are a risk for Robinhood given its reliance on the controversial “pay for order flow” business model.
Robinhood faces a double threat from the SEC and PayPal’s new app, which could make it harder for Robinhood to gain new users. I would be careful not to pay a high price-to-sell ratio of 21 for Robinhood shares at this time.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.