Robinhood's Cash Reserves Pay Off

Rising interest rates are helping Robinhood HOOD 9.39%.

Markets can survive slow periods, but there is still more work to be done to thrive again.

The broker reported Wednesday that its net interest revenue surged 73% from the second quarter to $128 million in the third quarter. That helped its average revenue per user to once again tick higher, to $63 from $56.The broker's strong third quarter performance was driven by a surge in net interest revenue, which rose 73% from the second quarter to $128 million. This helped the company's average revenue per user to once again tick higher, to $63 from $56.

The largest source of net interest revenue for the firm is interest on margin lending, which grew to $48 million in the third quarter from $39 million in the second quarter. Securities lending revenue also grew sequentially, to $29 million from $23 million. The firm’s fully-paid margin lending product, launched in May, contributed $4 million in revenue in the third quarter but is expected to eventually be much more significant.

Robinhood said that it has gathered about $1.5 billion in customer cash via its Gold accounts since it raised the rate for those customers to 3% in September. Cash sweeps, which move uninvested customer money to program banks, generated $8 million in third-quarter net interest revenue, up from just $2 million in the second quarter.

In the third quarter, net customer deposits into Robinhood grew at an annualized rate of 17%. The company also generated $20 million in net interest revenue from segregated customer cash and clearinghouse deposits.

The third quarter was a positive one for adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), which came in at $47 million. This was up from a loss of $80 million in the second quarter, and in line with the company's guidance that it would reach positive territory by the end of the year.Excluding some expenses such as share-based compensation and nonrecurring costs such as restructuring charges, the company is on track to reach its goal of positive EBITDA by the end of the year.

Investors shouldn’t get carried away, though. A portion of Robinhood’s interest revenue doesn’t come directly from customer activities but from its own corporate cash pile. Robinhood has more than $6 billion worth of cash on its balance sheet, which generated $29 million in net interest revenue in the last quarter. That is a good way to help Robinhood on its path to profitability, but it doesn’t necessarily represent deepening relationships with customers for investing and money management.

Cash is often a means to an end: getting people to do something with it. Otherwise, it is just a competition for who can offer customers the highest rates. In a less-upbeat sign, Robinhood says activity in margin borrowing and securities lending by customers is slowing so far in the fourth quarter.

Robinhood's trading engine is still moving forward slowly. Transaction-based revenues grew quarter-over-quarter, but by just 3% to $208 million, with growth in equities and options offset by shrinking crypto revenue. Robinhood says it is aiming to launch retirement products in time for tax season, which could be potentially another major funnel into the business and revenue generator. But that remains something for the future.

For now, Robinhood is earning revenue through higher rates, enabling it to keep moving forward as it launches important products. However, this is only a step on its journey, and the company will need to continue to adapt as the market cycle turns.