If you think about the arc of what drove TD Ameritrade (AMTD) into the arms of Schwab (SCHW) , you keep coming back to the disruptive force of Robinhood, a totally online company with a bare-bones presence where you trade for free: just the way the millennials like it.
The fact that Robinhood was able to raise $912 million, the last tranche received at the end of October, at a $7.6 billion valuation, told you the writing was on the wall, something that may also be the case for E-Trade, which, despite its venerable status as one of the first e-brokers and its $4 in earnings power, has a less than $10 billion valuation. Exact numbers are hard to come by, but Robinhood is thought to have almost as many accounts as E-trade, even as E-Trade, born in 1982, is thirty-one years older than Robinhood.
What does that say about valuations? One, it could mean that the private market is insane: How could a money-losing outfit with roughly the same number of accounts be worth almost as much as a highly profitable company that does the same thing? I have to admit the valuation does seem stupefying given how well E-Trade is doing. The company reported an outstanding quarter last month and when it announced numbers, it laid out a very solid case to buy the stock in this new commission-free era. It does seem radically cheaper than the private Robinhood -- and it is hard to believe that its legacy business is truly a negative.
Which brings me to a second conclusion: The investors who throw their money at Robinhood must love the age of the customers, not their current account balances, or they would surely buy the heavily discounted E-Trade over the start-up. Just like E-Trade of yore, Robinhood has brought a whole new generation of investors into the market, the iPhone-toting millennials who actually like individual stocks.
I know that the braintrusts that determine everything on Wall Street have convinced everyone that they are idiots if they take the risk of owning individual stocks and that it is better to own a basket of bad stocks in a bad sector than it is to own a good stock, period. You know I am a huge believer in owning index funds and, alongside that, I think you should pick some stocks just to try your hand at getting rich, something that individual stocks can do that index funds will not do within the timeframe that might impact your lifestyle. The deacons don't tell you that, or they will claim I am viewing stocks as lottery tickets, but that's nonsense.
Robinhood investors seem to enjoy trading stocks and ETFs, just like the predecessor clients who flocked to E-Trade where stocks were pretty much the only alternative.
Now Robinhood's website says the company doesn't offer fractional share trading. But rival SOFI does. Last week, we had Anthony Noto, CEO of SOFI, on Mad Money, and he gave us tremendous insight into millennial investing. They like ETFs, but they are truly partial to low-dollar-amount stocks. They had been drawn to the likes of GE (GE) and Ford (F) , until recently when SOFI began offering fractional shares. Now the number one stock? Amazon (AMZN) . They are buying a dollar's worth of Amazon to start a position.
What else are they buying? Of course they like the rest of the FAANG stocks. But, while it is anecdotal, they are drawn to Tesla (TSLA) . Who isn't, even my wife, Lisa, and my kids want one. And they are drawn to Beyond Meat (BYND) , both of which fit the millennial zeitgeist. They did like the cannabis stocks, I can't say they do so anymore, though.
What matters, though, is investing -- and trading -- have caught the fancy of a new generation of investors because of no commissions, and Robinhood was able to captivate them without much advertising at all. Now that it has raised almost $1 billion, though, it's able to blow out its model -- as we know from the new commercials that seem like they are everywhere -- and the landscape will ever be changed, once again, just as it was when E-Trade started 37 years ago.
