Is Robinhood Becoming a Betting Stock?

Key Points

• Robinhood is the online broker of choice for millions of investors, particularly those in younger demographics.

• Primary sources of revenue include transaction-based income and net interest derived from sources such as margin loans, securities lending, and credit card transactions, among others.

• The company has another potential growth outlet via sports betting.

• 10 stocks we like better than Robinhood Markets ›

For millions of investors -- 26.5 million funded accounts at the end of the second quarter -- Robinhood Markets (NASDAQ: HOOD) is a popular online broker that has made investing more accessible and approachable for scores of market participants, including those in younger demographics.

Meme coins, meme stocks, and leveraged exchange-traded funds (ETFs) are available on Robinhood, along with individual stocks, standard ETFs, and retirement accounts.

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The company's Robinhood Gold provides individual retirement account (IRA) matching and access to the Robinhood Gold Card -- an invite-only credit card. Gold is subscription-based, requiring customers to plunk down $5 a month or $50 a year upfront, which is great for investors because it's another recurring revenue stream. Clients are responding, as highlighted by year-over-year Gold growth of 1.5 million customers, according to the latest investor presentation.

Yes, Robinhood does many things that a bank does but with a younger, "growthier" profile. However, there's more happening in Sherwood Forest, including sports betting.

Robinhood: broker and book?

Robinhood isn't transforming into DraftKings (NASDAQ: DKNG) or FanDuel owner Flutter Entertainment (NYSE: FLUT), but the financial firm is showing a willingness to compete with those sportsbook titans. That competition is intensifying because Robinhood is ramping up its prediction markets platform.

Participants buy event contracts in yes/no form. These derivatives rose to prominence prior to the 2024 presidential election, with the help of regulations that prohibit domestic sportsbooks from booking bets on elections.

Days before Election Day, Robinhood jumped into the arena, offering approved clients the chance to purchase yes/no contracts. That was a prelude to something bigger. At the company's 2024 investor day, CEO Vlad Tenev confirmed that the company was mulling avenues to get into sports betting.

Robinhood was quick to do so, offering Super Bowl derivatives, which were yanked at the request of the Commodities Futures Trading Commission (CFTC). A similar fate befell the company during this year's NCAA basketball tournaments, when the brokerage firm pulled event contracts in New Jersey -- one of the top sports betting states.

Undaunted, Robinhood announced in August that it's offering yes/no derivatives on regular-season NCAA and NFL games this year. This is where things get interesting regarding the fracas with gaming companies.

Robinhood's ready for some football

The company handled about 1 billion event contracts in the period from April through June. That number was achieved without the benefit of football.

Football is the sport most wagered on in the U.S., and even without its assistance, Robinhood processed a "large percentage" of sports contracts in the quarter ending in June, according to CFO Jason Warnick. The CFO also stated that the company will "add selections across all elements of culture." Translation: Robinhood is likely to expand the "wagering" side of its business while potentially causing some lost sleep for gaming companies. Robinhood knows many of its clients like sports and that a fair number are probably bettors, too.

"People have been talking about the potential for sports event contracts and taking that into the regulated space. And a lot of our customers who index on millennials and Gen Z are interested in sports in general," said Tenev at the company's 2024 investor day.

Robinhood has betting advantages, kinks to iron out

Robinhood has some advantages. First -- and this really causes insomnia for gaming companies -- is federal regulation of prediction markets. That means those companies can do business in all 50 states, but sports betting is currently legal in just 39 states, and sportsbooks deal with a hodgepodge of state-level protocols.

Second, Robinhood also possesses an investment advantage. It's one of a small number of publicly traded entities with event contracts exposure at a time when valuations for the biggest closely held pure-play names in the space are ballooning. Although "event contract" was barely mentioned in the company's recent Q2 investor presentation, implying it's more Friar Tuck than vital cog in the broader wheel, Robinhood could be the prime way for investors to gain some public exposure to prediction markets.

There are issues to be ironed out. During NFL week one, prediction markets offered inferior pricing relative to DraftKings and FanDuel. That's not lost on savvy bettors who shop around for the best lines. Likewise, Robinhood is not yet offering parlays and player props, the former of which are high-margin bets for sportsbooks, because, well, bettors rarely cash those tickets.

Bottom line: Robinhood's prediction market moves are worth monitoring and represent another arrow in the quiver, but one of the newest members of the S&P 500 is a long way from being a gaming company. It probably won't ever be.

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Todd Shriber does not own any of the stocks mentioned in this article. The Motley Fool recommends Flutter Entertainment Plc. The Motley Fool has a disclosure policy.