Dear Professor Galloway …Let’s Talk about Schwab and Robinhood

Part of my job is fielding stressful emails from limited partners.

This week it was about the zero commission wars that Charles Schwab decided to join/accelerate.

I tried to get in front of the conversation by making a lot of calls and thinking through the announcements and number changes and wrote about it here.

Yesterday, professor Galloway, who I read and link to often, had this to say about the Schwab news and Robinhood specifically:

Until yesterday, Robinhood was a disruptor. But Schwab announced they were eliminating commissions on trades, and Robinhood’s top of the funnel (customer acquisition) collapsed. Schwab has other products/revenue streams. Robinhood’s VCs must now fund a company whose $7.6 billion valuation (see above: white powder around nostrils) was cut in half yesterday. Similar to Walmart, Schwab’s leadership will result in multiple expansion. Look for Schwab stock to recover its 8 percent one-day loss within 30 days.

I think the professor has this one completely wrong.

Schwab is in NO way similar to Walmart in category leadership. They will in no way get multiple expansion unless interest rates reverse and begin softly trending higher. Their drop in commissions will not in any way improve their product offerings or change the mega trend away from active management to ‘fake passive’ investing nor will it improve their mobile offerings.

I will say that a new wave of mega mergers could disrupt the landscape and Schwab may or may not participate in it.

Finally, I doubt Schwab will bounce so quickly. The stock has been dropping hard the last twelve months and has now gapped to three year lows on the strategy shift. Have a look at this chart of Schwab:

If it does bounce quickly, I think there are many sellers looking to cut and run on what is perceived as a secular shift down in Schwab’s business.

On the other side of this trade, the top of the funnel has not at all changed for Robinhood. I highly doubt Robinhood ever needs more capital to get public. Robinhood was never competing on features with Schwab. They can’t and likely won’t. Robinhood created it’s value by arbitraging the $300-$500 Schwab and TD Ameritrade pay for customer acquisition with Venture Money. It has been a great arbitration and Robinhood has built a customer acquisition growth machine and business model around a simple value proposition of design and UI. The top of the funnel only got harder for Schwab versus ETrade, Fidelity, Goldman and TD Ameritrade as their budgets for customer acquisition get slashed and they reorganize product and marketing teams for this new world of lower revenues. In my opinion it will get uglier before it gets better for the old school brokers.

Finally, I am not sure why the professor calls Schwab a leader. This leader let me walk out the door this year after 10 years never to come back (have a read because it was a popular post). Zero commissions wont change this problem.

All of that said, it was easy for the Professor to lump Robinhood in with all the other Unicorns right now. He’s busy fighting off Goldman Sachs pestering him for his assets and thinks Schwab might just be the answer. He will be sorely disappointed because the only one watching out for his money will be and should be him.

I would wager a few bucks with the good professor that Robinhood does get public in the next 24 months at a valuation in line or above their most recent valuation.

I will also reach out have him on my podcast when I get back to help him with his new money management problems.