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  • London-based Robinhood rival Freetrade buys UK arm of Australian investing platform Stake

    London-based Robinhood rival Freetrade buys UK arm of Australian investing platform Stake

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    People walk along London Bridge past the City of London skyline.

    Sopa Images | Lightrocket | Getty Images

    London-based online trading platform Freetrade told CNBC Tuesday that it’s agreed to buy the U.K. customer book of Stake, an Australian investing app.

    The move is part of a broader bid from Freetrade to bolster its domestic business and comes as British digital investment platforms face rising competition from new entrants — not least U.S. heavyweight Robinhood.

    The startup told CNBC exclusively that it entered into a transaction with Stake to take on all of the company’s clients and move all assets the firm manages in the U.K. over to its own platform.

    Freetrade and Stake declined to disclose financial information of the deal, including the value of Stake’s U.K. customer book.

    Stake, which is based in Sydney, Australia, was founded in 2017 by entrepreneurs Matt Leibowitz, Dan Silver and Jon Abitz with the aim of providing low-cost brokerage services to retail investors in Australia.

    The company, which also operates in New Zealand, launched its services in the U.K. in 2020. However, after a recent business review, Stake decided to focus primarily on its Australia and New Zealand operations.

    Following the deal, customers of Stake U.K. will be contacted with details about how to move their money and other assets over to Freetrade in “the coming weeks,” the companies said. Customers will still be able to use their Stake account until assets and cash are transferred to Freetrade in November.

    Freetrade operates primarily in the U.K. but has sought to expand into the European Union. It offers a range of investment products on its platform, including stocks, exchange-traded funds, individual savings accounts, and government bonds. As of April 2024, it had more than 1.4 million users.

    Earlier this year, CNBC reported that the startup’s co-founder and CEO, Adam Dodds, had decided to depart the company after six years at the helm. He was replaced by Viktor Nebehaj, the firm’s then-chief operating officer.

    Freetrade was a beneficiary of the 2020 and 2021 retail stock investing frenzy, which saw GameStop and other so-called “meme stocks” jump to wild highs. In the years that followed, Freetrade and its rivals, including Robinhood were impacted by higher interest rates which hammered investor sentiment.

    In 2022, Freetrade announced plans to lay off 15% of its workforce. The following year, the firm saw its valuation slump 65% to £225 million ($301 million) in an equity crowdfunding round. Freetrade at the time blamed a “different market environment” for the reduction in its market value.

    More recently, though, things have been turning around for the startup. Freetrade reported its first-ever half year of profit in 2024, with adjusted earnings before interest, tax, depreciation and amortization hitting £91,000 in the six months through June. Revenues climbed 34% year-over-year, to £13.1 million.

    “I’m focused on scaling Freetrade into the leading commission-free investment platform in the UK market,” CEO Nebehaj said in a statement shared with CNBC. “This deal shows our commitment to capitalise on opportunities for inorganic growth to reach that goal.”

    “Over the last few months, we have worked closely with Stake to ensure a smooth transition and good outcomes for their UK customers. We look forward to welcoming them and continuing to support them on their investment journeys.”

    Freetrade currently manages more than £2 billion worth of assets for U.K. clients. Globally, Stake has over $2.9 billion in assets under administration.

    Robinhood, a far larger player in the U.S. with $144 billion in assets under management, launched in the U.K. in November 2023 to much fanfare. Earlier this month, the company launched a securities lending scheme in the U.K., in a bid to further entice prospective British clients.

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  • GameStop soars 60% as ‘Roaring Kitty’, who drove meme craze, resurfaces

    GameStop soars 60% as ‘Roaring Kitty’, who drove meme craze, resurfaces

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    GameStop shares rallied dramatically on Monday after “Roaring Kitty,” the man who inspired the epic short squeeze of 2021, posted online for the first time in roughly three years.

    The post, a picture on X of a video gamer leaning forward on their chair as if to indicate he’s taking the game seriously, marked Roaring Kitty’s first post on the platform — or on Reddit— since 2021. The post has garnered 63,000 likes in 13 hours.

    GameStop last traded up 70% after soaring as much as 110%. Trading in GameStop was halted multiple times due to volatility. AMC, another meme stock, jumped 22% Monday, while Reddit traded 13% higher.

    Roaring Kitty, whose legal name is Keith Gill, is a former marketer for Massachusetts Mutual Life Insurance. Also known as DeepF——Value on Reddit, Gill drew an army of day traders who cheered each other on and piled into the brick-and-mortar video game stock, and GameStop call options, between 2020 and 2021.

    The “meme stock” frenzy involved individual investors taking aim at short sellers and hedge funds who were pessimistic about the outlook for GameStop and other companies, forcing them to cover their short positions and drive up the price of the target stocks. Currently, the short position in GameStop shares amounts to more than 24% of all its shares that are freely available to trade, also known as the float.

    Gill later posted a few videos with scenes from popular TV shows and movies, but there’s no clear indication of what they mean.

    GameStop was the most talked about stock on Reddit’s WallStreetBets by far on Monday, with more than 600 mentions in the last 24 hours, surpassing the popular chipmaker Nvidia, according to market research platform Quiver Quantitative. 

    The poster child was hedge fund Melvin Capital, which was heavily shorting GameStop and became a target of the army of amateur traders, suffering huge losses that prompted Ken Griffin’s Citadel, as well as Point72, to backstop Melvin’s finances with close to $3 billion in support.

    Short selling is a strategy in which investors borrow shares of a stock at a certain price in expectations that the market value will fall below that level when it’s time to pay for the borrowed shares.

    The GameStop mania that drove its stock above $120 a share, split-adjusted, in early 2021 from as little as $3 in the space of three months, forced brokerages including Robinhood to limit trading in heavily shorted stocks. In response, one Robinhood user filed a class-action lawsuit after the app’s decision to restrict GameStop trading on its platform. The suit was dismissed in August 2023.

    Another class-action lawsuit brought against Gill alleged he pretended to be a novice trader despite being a licensed professional.

    The volatility spawned a series of congressional hearings around brokers’ practices and gamifying retail trading, and testimony from leaders of Robinhood, Melvin Capital, Reddit and Citadel, as well as Gill. The entire episode finally inspired the 2023 movie “Dumb Money,” in which Paul Dano played Gill.

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    In January 2021, GameStop shares hit an all-time high of $120.75 intraday, adjusted for a subsequent 4-for-1 stock split in the summer of 2022. But as interest from individual investors eventually faded, the stock collapsed along with other meme stocks such as AMC Entertainment Holdings. GameStop last month hit a three-year low of $9.95.

    Recently, the stock has started to move higher, which may have rekindled Gill’s interest, along with the enormous amount of short interest in the name. GameStop has soared 57% so far in May, closing Friday at $17.46.

    But the fundamental business at GameStop, evidenced by its most recent earnings report, shows a discouraging picture at the video game company. In late March, GameStop said it had cut an unspecified number of jobs to reduce costs, and reported lower fourth-quarter revenue amid rising competition from e-commerce-based competitors.

    GameStop posted revenue of $1.79 billion for the fiscal fourth quarter, compared with $2.23 billion in the same quarter a year earlier.

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  • Walmart-backed fintech One introduces buy now, pay later as it prepares bigger push into lending

    Walmart-backed fintech One introduces buy now, pay later as it prepares bigger push into lending

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    Customers shop in a Walmart Supercenter on February 20, 2024 in Hallandale Beach, Florida.

    Joe Raedle | Getty Images News | Getty Images

    Walmart’s majority-owned fintech startup One has begun offering buy now, pay later loans for big-ticket items at some of the retailer’s more than 4,600 U.S. stores, CNBC has learned.

    The move puts One in direct competition with Affirm, the BNPL leader and exclusive provider of installment loans for Walmart customers since 2019. It’s a relationship that the Bentonville, Arkansas, retailer expanded recently, introducing Affirm as a payment option at Walmart self-checkout kiosks.

    It also likely signals that a battle is brewing in the store aisles and ecommerce portals of America’s largest retailer. At stake is the role of a wide spectrum of players, from fintech firms to card companies and established banks.

    One’s push into lending is the clearest sign yet of its ambition to become a financial superapp, a mobile one-stop shop for saving, spending and borrowing money.

    Since it burst onto the scene in 2021, luring Goldman Sachs veteran Omer Ismail as CEO, the fintech startup has intrigued and threatened a financial landscape dominated by banks — and poached talent from more established lenders and payments firms.

    But the company, based out of a cramped Manhattan WeWork space, has operated mostly in stealth mode while developing its early products, including a debit account released in 2022.

    Now, One is going head-to-head with some of Walmart’s existing partners like Affirm who helped the retail giant generate $648 billion in revenue last year.

    Walmart’s Fintech startup One is now offering BNPL loans in Secaucus, New Jersey.

    Hugh Son | CNBC

    On a recent visit by CNBC to a New Jersey Walmart location, ads for both One and Affirm vied for attention among the Apple products and Android smartphones in the store’s electronics section.

    Offerings from both One and Affirm were available at checkout, and loans from either provider were available for purchases starting at around $100 and costing as much as several thousand dollars at an annual interest rate of between 10% to 36%, according to their respective websites.

    Electronics, jewelry, power tools and automotive accessories are eligible for the loans, while groceries, alcohol and weapons are not.

    Buy now, pay later has gained popularity with consumers for everyday items as well as larger purchases. From January through March of this year, BNPL drove $19.2 billion in online spending, according to Adobe Analytics. That’s a 12% year-over-year increase.

    Walmart and One declined to comment for this article.

    Who stays, who goes?

    One’s expanding role at Walmart raises the possibility that the company could force Affirm, Capital One and other third parties out of some of the most coveted partnerships in American retail, according to industry experts.

    “I have to imagine the goal is to have all this stuff, whether it’s a credit card, buy now, pay later loans or remittances, to have it all unified in an app under a single brand, delivered online and through Walmart’s physical footprint,” said Jason Mikula, a consultant formerly employed at Goldman’s consumer division.

    Affirm declined to comment about its Walmart partnership. Shares of Affirm climbed 2% Tuesday, rebounding after falling more than 8% in premarket activity.

    For Walmart, One is part of its broader effort to develop new revenue sources beyond its retail stores in areas including finance and health care, following rival Amazon’s playbook with cloud computing and streaming, among other segments. Walmart’s newer businesses have higher margins than retail and are a part of its plan to grow profits faster than sales.

    In February, Walmart said it was buying TV maker Vizio for $2.3 billion to boost its advertising business, another growth area for the retailer.

    ‘Bank of Walmart’

    When it comes to finance, One is just Walmart’s latest attempt to break into the banking business. Starting in the 1990s, Walmart made repeated efforts to enter the industry through direct ownership of a banking arm, each time getting blocked by lawmakers and industry groups concerned that a “Bank of Walmart” would crush small lenders and squeeze big ones.

    To sidestep those concerns, Walmart adopted a more arms-length approach this time around. For One, the retailer created a joint venture with investment firm firm Ribbit Capital — known for backing fintech firms including Robinhood, Credit Karma and Affirm — and staffed the business with executives from across finance.

    Walmart has not disclosed the size of its investment in One.

    The startup has said that it makes decisions independent of Walmart, though its board includes Walmart U.S. CEO, John Furner, and its finance chief, John David Rainey.

    One doesn’t have a banking license, but partners with Coastal Community Bank for the debit card and installment loans.

    After its failed early attempts in banking, Walmart pursued a partnership strategy, teaming up with a constellation of providers, including Capital One, Synchrony, MoneyGram, Green Dot, and more recently, Affirm. Leaning on partners, the retailer opened thousands of physical MoneyCenter locations within its stores to offer check cashing, sending and receiving payments, and tax services.

    From paper to pixels

    But Walmart and One executives have made no secret of their ambition to become a major player in financial services by leapfrogging existing players with a clean-slate effort.

    One’s no-fee approach is especially relevant to low- and middle-income Americans who are “underserved financially,” Rainey, a former PayPal executive, noted during a December conference.

    “We see a lot of that customer demographic, so I think it gives us the ability to participate in this space in maybe a way that others don’t,” Rainey said. “We can digitize a lot of the services that we do physically today. One is the platform for that.”

    One could generate roughly $1.6 billion in annual revenue from debit cards and lending in the near term, and more than $4 billion if it expands into investing and other areas, according to Morgan Stanley.

    Walmart can use its scale to grow One in other ways. It is the largest private employer in the U.S. with about 1.6 million employees, and it already offers its workers early access to wages if they sign up for a corporate version of One.

    Walmart’s next card

    There are signs that One is making a deeper push into lending beyond installment loans.

    Walmart recently prevailed in a legal dispute with Capital One, allowing the retailer to end its credit-card partnership years ahead of schedule. Walmart sued Capital One last year, alleging that its exclusive partnership with the card issuer was void after it failed to live up to contractual obligations around customer service, assertions that Capital One denied.

    The lawsuit led to speculation that Walmart intends to have One take over management of the retailer’s co-branded and store cards. In fact, in legal filings Capital One itself alleged that Walmart’s rationale was less about servicing complaints and more about moving transactions to a company it owns.

    “Upon information and belief, Walmart intends to offer its branded credit cards through One in the future,” Capital One said last year in response to Walmart’s suit. “With One, Walmart is positioning itself to compete directly with Capital One to provide credit and payment products to Walmart customers.”

    A Capital One Walmart credit card sign is seen at a store in Mountain View, California, United States on Tuesday, November 19, 2019.

    Yichuan Cao | Nurphoto | Getty Images

    Capital One said last month that it could appeal the decision. The company declined to comment further.

    Meanwhile, Walmart said last year when its lawsuit became public that it would soon announce a new credit card option with “meaningful benefits and rewards.”

    One has obtained lending licenses that allow it to operate in nearly every U.S. state, according to filings and its website. The company’s app tells users that credit building and credit score monitoring services are coming soon.

    Catching Cash App, Chime

    And while One’s expansion threatens to supersede Walmart’s existing financial partners, Walmart’s efforts could also be seen as defensive.

    Fintech players including Block’s Cash App, PayPal and Chime dominate account growth among people who switch bank accounts and have made inroads with Walmart’s core demographic. The three services made up 60% of digital player signups last year, according to data and consultancy firm Curinos.

    But One has the advantage of being majority owned by a company whose customers make more than 200 million visits a week.

    It can offer them enticements including 3% cashback on Walmart purchases and a savings account that pays 5% interest annually, far higher than most banks, according to customer emails from One.

    Those terms keep customers spending and saving within the Walmart ecosystem and helps the retailer better understand them, Morgan Stanley analysts said in a 2022 research note.

    “One has access to Walmart’s sizable and sticky customer base, the largest in retail,” the analysts wrote. “This captive and underserved customer base gives One a leg up vs. other fintechs.”

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  • Here are Wednesday's biggest analyst calls: Tesla, Walmart, Qualcomm, Deere, Robinhood, Shopify & more

    Here are Wednesday's biggest analyst calls: Tesla, Walmart, Qualcomm, Deere, Robinhood, Shopify & more

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  • Robinhood CEO defends payment for order flow, says practice is ‘here to stay’

    Robinhood CEO defends payment for order flow, says practice is ‘here to stay’

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    Vlad Tenev, co-founder and CEO of Robinhood, rings the opening bell at the Nasdaq on July 29, 2021.

    Source: The Nasdaq

    Robinhood CEO Vlad Tenev says he doesn’t believe that the payment for order flow (PFOF) model of market-maker routing that the company incorporates in the U.S. is under threat.

    That’s despite calls from notable consumer trading advocates and regulators for a ban on the practice.

    Speaking with CNBC, Tenev defended the practice of PFOF, saying that it’s “inherently here to stay.” PFOF is the practice of routing trades through market-makers like Citadel Securities in return for a slice of the profits.

    “If I’m a business that’s selling things, and I’m generating transaction revenue, the more you use it, the more money you get. Inherently, there’s a conflict there because I make more money by getting you to transact more,” Tenev told CNBC in an interview.

    “I think it’s important not to take the baby out with the bathwater. What does that mean, you shouldn’t make revenue on a transaction-based business? That’s unreasonable. And I think the point has been politicised to some degree.”

    PFOF is viewed as controversial because of the perceived conflict of interest it creates between the broker and clients.

    Critics say that brokers have an incentive to direct order flow to market makers offering PFOF arrangements over the interests of their clients.

    PFOF is banned in the U.K., where Robinhood announced plans to launch Thursday.

    The U.S. Securities and Exchange Commission had looked at banning PFOF in light of concerns surrounding the practice, but opted not to, while the European Union has imposed a blanket ban on PFOF.

    PFOF accounts for a small chunk of Robinhood’s revenues today, Tenev said, while much of its income today comes from net interest income which is generated from cash in user balances.

    Transaction-based revenues, which includes PFOF, decreased 7% in Robinhood’s second fiscal quarter to $193 million.

    “If you look at equities, PFOF in particular, it’s about 5%. of our revenue, so a much smaller component of the overall pie. And we’ve diversified the business quite a bit,” including other areas like securities lending, margin, and subscriptions.

    Robinhood’s race to the bottom on commission fees has forced many major players in the wealth management world to slash their own fees to zero, in turn causing some companies to wind up or sell up to competitors.

    TD Ameritrade was sold to Charles Schwab for $26 billion, while Morgan Stanley bought E-Trade for $13 billion.

    “In the U.S., Robinhood came along and really changed the industry,” Tenev said. “The discount brokers that are charging commissions essentially ceased to exist.”

    “They had to drop commissions to zero. A lot of them couldn’t survive that transition as standalone companies and ended up consolidating. And we’re still living through the the end result of that.”

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  • ‘T-bill and chill’: Why Jack Bogle’s strategy of ‘lazy’ investing is making a comeback

    ‘T-bill and chill’: Why Jack Bogle’s strategy of ‘lazy’ investing is making a comeback

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    Jack Bogle

    Mark Lennihan | AP

    Boring investing is making a comeback.

    With the meme-stock rally in the rearview mirror and interest rates surging, individual investors are rediscovering the philosophy made famous by Vanguard’s founder, Jack Bogle. The father of market indexes preached low-cost, passive investments that compound over years. Fans call themselves “Bogleheads,” and the strategy “lazy” investing.

    They’re well positioned for the current market. Timing has proved difficult this year, with eight days accounting for all of the S&P 500’s gains, according to DataTrek. Higher rates have slammed tech and growth stocks, which dominated retail traders’ portfolios during the pandemic. GameStop, the original meme trade, is down roughly 85% from its all-time high.

    Dan Griffin, a self-proclaimed Boglehead based in Florida, said he watched the meme stock rally in amusement. The current market condition is proof that his “tortoise” investing approach is the right one to building long-term wealth, he said.

    “It’s a little bit of vindication,” Griffin told CNBC. “I’m happy to be the boring investor, I’m happy to be the tortoise. While the hare does win sometimes, the tortoise more often than not, is going come out ahead.”

    Christine Benz, a director of personal finance and retirement planning for Morningstar, said investors are gravitating towards higher yields right now to capture value — another core principle of the Bogleheads.

    “Bogleheads are investing for the very long haul — the idea is that you’re putting money into your account and just adding to it, maybe not touching it or looking at it for another 30 years,” she said. “The meme stock phenomenon seemed so focused on being incredibly plugged into your portfolio and monitoring your investments — I see the Bogleheads’ philosophy as being antithetical to all of that.”

    Wall Street Bets to Bogleheads

    Brokerage firm Robinhood, once synonymous with day trading, is seeing a similar pivot to higher yields and longer-term thinking.

    The company launched retirement accounts this year, and offers 3% back on cash as it tries to diversify away from slumping trading fees. Robinhood’s co-founder and CEO Vlad Tenev told CNBC that investors have been moving into cash, money market funds and bond ETFs. He noted more chatter in Bogleheads’ Reddit group, versus the infamous Wall Street Bets.

    “One of the really interesting things that we’ve seen over the past couple of months is Robinhood being mentioned, and discussed in these traditional passive investing forums, like Bogleheads on Reddit,” Tenev said. “People are building long-term portfolios on Robinhood, taking advantage of the better economics and the tools to do that.”

    Bond ETFs are one way retail investors have tried to capture rising interest rates. The SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) was the third most-bought name last week after the Invesco QQQ Trust (QQQ) and SPDR S&P 500 ETF (SPY), according to Vanda Research. It saw the largest single-day of net inflows to the ETF since the firm began measuring it almost a decade ago.

    “Clearly, income-seeking retail investors are taking advantage of the new high-rate regime, which had been missing from the investment landscape since the pre-GFC [Great Financial Crisis] years,” Marco Iachini, senior vice president of Vanda Research, said in a note to clients. “Some are calling it ‘T-Bill and chill.'”

    Younger investors are even more exposed to fixed income compared to their older counterparts. In its annual study, Schwab Asset Management shows millennial ETF investors have 45% of their portfolios in fixed income — compared to 37% for Generation X. The survey showed 51% of millennials plan to invest in bond ETFs next year, compared to 40% of baby boomers.

    While far from a meme stock, the move to fixed income could still be risky.

    The iShares 20+ Year Treasury Bond ETF (TLT), has seen $19.8 billion in assets flood in this year, according to BlackRock. If yields go up, funds like TLT will suffer — since bond yields move inversely to prices. That’s been the case this year, with TLT down about 50% from its record high. On the other hand, if yields fall, bond funds should outperform.

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  • Apple and Goldman were planning stock-trading feature for iPhones until markets turned last year

    Apple and Goldman were planning stock-trading feature for iPhones until markets turned last year

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    As equities soared in 2020 and consumers flocked to trading apps like Robinhood, Apple and Goldman Sachs were working on an investing feature that would let consumers buy and sell stocks, according to three people familiar with the plans.

    The project was shelved last year as the markets turned south, said the sources, who asked not to be named because they weren’t authorized to speak on the matter.

    The effort, which has not been previously reported, would have added to Apple’s suite of financial products powered by Goldman. Apple first teamed up with the Wall Street bank to offer a credit card in 2019, and then added buy now, pay later (BNPL) loans and a high-yield savings account. The company said last month that the savings account offering had climbed past $10 billion in user deposits.

    Representatives for Apple and Goldman declined to comment.

    Apple CEO Tim Cook holds a new iPhone 15 Pro during the ‘Wonderlust’ event at the company’s headquarters in Cupertino, California, U.S. September 12, 2023. 

    Loren Elliott | Reuters

    Apple was working on the investing feature at a time of zero interest rates during Covid, when consumers were stuck at home and spending more of their time and their record savings in trading shares, including meme stocks like GameStop and AMC, from their smartphones.

    Apple’s conversations with Goldman began during that hype cycle in 2020, two sources said. Their work progressed, and an Apple investing feature was meant to roll out in 2022. One hypothetical use case pitched by executives involved the ability for iPhone users with extra cash to put money into Apple shares, one person said.

    But as markets were roiled by higher rates and soaring inflation, the Apple team feared user backlash if people lost money in the stock market with the assistance of an Apple product, the sources said. That’s when the iPhone maker and Goldman switched directions and pushed the plan to launch savings accounts, which benefit from higher rates.

    The status of the stock-trading project is unclear after Goldman CEO David Solomon bowed to internal and external pressure and decided to retrench from nearly all of the bank’s consumer efforts. One source said the infrastructure for an investing feature is mostly built and ready to go should Apple eventually decide to move forward with it.

    The Apple Card launched with much fanfare three years ago, but the business brought regulatory heat and racked up losses as its user base expanded. Earlier this year, Goldman rolled out a high-interest savings account for Apple Card users, offering a 4.15% annual percentage yield.

    Goldman was also central to Apple’s BNPL offering. The product, called Apple Pay Later, can be used for purchases of $50 to $100 “at most websites and apps that accept Apple Pay,” according to the support page. Borrowers can split a purchase into four payments over six weeks without incurring interest or fees.

    Before Goldman’s pivot away from retail banking, the company examined ways to expand its partnership with Apple, sources said. More recently, Goldman was in discussions to offload both its card and savings account to American Express.

    Had plans for the trading app progressed, Apple would have entered a market with stiff competition, featuring the likes of Robinhood, SoFi and Block’s Square, along with traditional brokerage firms such as Charles Schwab and Morgan Stanley’s E-Trade.

    Stock trading has become another way for financial firms to keep customers and drive engagement on their platforms. Apple was pursuing the same approach, one source said. It’s a move that could capture the interest of regulators, who have scrutinized Apple for its App Store practices. Robinhood has also been grilled by regulators for what they described as “gamifying” markets.

    Other tech companies have been pushing into the space. Elon Musk’s X, formerly known as Twitter, is working on a way to let users buy stocks and cryptocurrencies through a partnership with eToro. PayPal had plans to launch stock trading after hiring a key industry executive in 2021. But the company abandoned those plans, and said on an earnings call that it would cut spending and refocus on its core e-commerce business.

    WATCH: Goldman’s Apple Card faces mounting credit losses

    Goldman's Apple Card faces mounting credit losses

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  • The meme stock mania is now a movie. Here’s what has happened to GameStop and AMC

    The meme stock mania is now a movie. Here’s what has happened to GameStop and AMC

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    A scene from the trailer for the film: Dumb Money

    Courtesy: Sony Pictures Entertainment

    As shares of GameStop start to climb in late 2020 and the early days 2021, in the midst of the pandemic, characters in the new movie “Dumb Money” encourage their friends to sell.

    There’s Pete Davidson, playing the brother of Paul Dano’s Keith Gill, aka Roaring Kitty, telling the burgeoning YouTube star to cash out and buy a Ferrari. There’s Anthony Ramos’ Marcus, a GameStop cashier, being lectured by his parents that this stock trading thing isn’t real. And there’s America Ferrera’s Jenny, a nurse and single mom, whose coworker tells her that taking financial advice from a guy in a headband is not the best use of her time or money.

    But those characters and the others in the film, which hits theaters this weekend, don’t just ignore that advice. They double down, buying more shares and options, and start to incessantly check their phones and TV news to see how high the stock is climbing.

    “Diamond hands … we’re going to hold the line,” Jenny says.

    To the moon

    The very peak of the meme stock mania, which saw retail traders encourage one another on social media sites like Reddit’s WallStreetBets to buy and hold heavily shorted stocks, came on Jan. 27, 2021.

    That’s the day GameStop hit its all-time closing high of $86.88 per share, and saw more than 373 million shares change hands. One year earlier, in 2020, GameStop traded about 8.5 million shares on the same day.

    That was also the highest volume day on record for theater chain AMC Entertainment, topping 142 million — up from less than 400,000 on the same day a year earlier. Shares of AMC would hit their own record high in June.

    The excitement has since ebbed, even if it hasn’t gone away completely, and traders who bought shares on that day would now be deeply in the red. On Thursday, GameStop closed more than 78% below its all-time high. AMC was down more than 97% from its peak.

    Reddit versus Wall Street

    Many social media traders discussed the meme stock moment in David vs Goliath terms — the retail traders versus the hedge funds.

    And the retail traders won at least some of the battles. The massive spikes in the stocks were caused in part by “short squeezes,” which occur when a rising stock forces those investors who bet against the company to cover their position by buying back shares to limit their losses, creating a feedback loop that pushes the stock even higher.

    The losses caused Gabe Plotkin, a short-seller played by Seth Rogen who bet against GameStop with his hedge fund Melvin Capital, to completely shut down his fund.

    There were also accusations of fraud.

    The high level of short interest, and appearances by several meme stocks on the SEC’s “fail to deliver” lists, fueled theories from retail traders that there was “naked” or synthetic short trading going on. An SEC staff report on GameStop found no evidence of naked short selling, however.

    Another center of the controversy was the brokerage firms themselves, particularly Robinhood.

    Several brokerages limited trading in meme stocks at the height of the meme stock mania. The massive moves in the stocks, combined with heavy options trading activity, appeared to overwhelm the ability of companies like Robinhood to manage risk.

    Robinhood itself went public in July 2021. The stock is down more than 70% from its IPO price.

    AMC and GameStop

    As for the meme stock companies themselves, it is still unclear whether the fundamental theories of some Reddit traders were correct.

    The GameStop turnaround efforts of Chewy co-founder Ryan Cohen, who became something of a hero to the retail traders, have shown little sign of working. Former Amazon executive Matthew Furlong was ousted as GameStop CEO in June after about two years on the job, just one move in a series of executive shakeups at the company.

    The financial results have also been underwhelming. The company generated just under $1.2 billion in net sales in the second quarter of 2023, its most recent report. In the second quarter of 2019, before the meme stock mania began, the company generated about $1.3 billion in net sales.

    Meanwhile, AMC CEO Adam Aron has leaned into the meme stock status for the theater chain, offering rewards like popcorn for shareholders.

    The company has also used its popularity to raise additional cash by selling more shares. AMC announced on Wednesday that it had raised more than $300 million in an equity raise made possible by a corporate finance maneuver involving preferred stock it called APE shares — a cheeky reference to one of the references Redditors adopted for themselves.

    The new cash has certainly been a big support for AMC with the box office still struggling to reach pre-pandemic levels, but the theater chain also made the curious move to buy a stake in a gold mine.

    The AMC stock sales have diluted the holdings of individual shareholders, and the market cap of AMC is still down more than 50% from its peak.

    For the Wall Street titans who became the enemies of Reddit traders, the results have been mixed. Several short-sellers have said they pulled back from that business after the meme stock squeezes, though other trading firms likely made profits in the highly volatile markets.

    And even after his fund sustained heavy losses, Plotkin still had a enough money to buy a controlling interest in the Charlotte Hornets NBA Franchise.

    A scene from the trailer for the film: Dumb Money

    Courtesy: Sony Pictures Entertainment

    At the end of “Dumb Money,” the movie shows the gain in net worth of many of the retail traders who sold their shares, presumably near the top. Several of the characters made more than $100,000 on their trades.

    But Jenny, the nurse character whose Reddit name was “StonkMom,” was still holding on to the stock — her net worth having dropped back below zero.

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  • Robinhood buys back shares from the U.S. Marshal Service, originally owned by FTX founder Sam Bankman-Fried

    Robinhood buys back shares from the U.S. Marshal Service, originally owned by FTX founder Sam Bankman-Fried

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    Shares of Robinhood Markets Inc.
    HOOD,
    +2.62%
    galloped 2.6% higher Friday, after the trading app disclosed that it bought back 55.3 million of its shares from the U.S. Marshal Service. The company said it paid $605.7 million for the shares, which represents 6.1% of the company’s market capitalization of $9.93 billion at Thursday’s close. The shares were originally acquired through Emergent Fidelity Technologies Ltd. by Sam Bankman-Fried, founder of failed cryptocurrency exchange FTX that collapsed last year. The shares were seized and transferred to the custody of the U.S. Robinhood’s stock has rallied 20.7% over the past three months through Thursday, while the S&P 500
    SPX,
    +0.24%
    has gained 6.8%.

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  • Stocks making the biggest moves midday: SolarEdge Technologies, Humana, Starbucks, Robinhood and more

    Stocks making the biggest moves midday: SolarEdge Technologies, Humana, Starbucks, Robinhood and more

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    A Solarpro employee installs a SolarEdge Technologies Inc. inverter at a residential property in Sydney, May 17, 2021.

    Brendon Thorne | Bloomberg | Getty Images

    Check out the companies making the biggest moves midday:

    SolarEdge Technologies — The solar stock tumbled about 19% after the company reported $991 million in revenue, missing analysts’ estimates of $992 million, according to Refinitiv. SolarEdge also issued disappointing third-quarter revenue guidance.

    CVS Health — The retail pharmacy stock gained 4% during midday trading Wednesday after the company posted strong earnings and revenue for the second quarter. CVS reported earnings of $2.21 per share on revenue of $88.9 billion, while Wall Street analysts expected $2.11 per share on earnings of $86.5 billion, according to Refinitiv.

    Norwegian Cruise Line — The cruise stock sank 3.2%, a day after reporting weaker-than-expected guidance for the third quarter. Its second-quarter earnings, however, topped analysts’ estimates. Shares were also downgraded by Susquehanna to neutral from positive. The Wall Street firm said Norwegian’s return to pre-pandemic EBITDA margin will take some time.

    Emerson Electric — Shares rallied 4% following Emerson Electric’s earnings and revenue beat for its fiscal third quarter. The company reported adjusted earnings per share of $1.29, topping the $1.10 expected from analysts polled by StreetAccount. Revenue was $3.95 billion, compared to the $3.88 billion expected by Wall Street.

    Pinterest — The social media platform slid 4.9% despite beating expectations on revenue for the second quarter. Pinterest posted $708 million against FactSet’s $696.4 consensus estimate. Pintrest’s third-quarter revenue growth forecast, however, missed expectations.

    Starbucks — Shares added 2.6% following the coffee giant’s earnings report was released. Starbucks adjusted earnings per share for the fiscal third quarter was $1, versus the 95 cents expected by analysts, per Refinitiv. However, revenue fell short at $9.17 billion compared to the $9.39 billion expected.

    Advanced Micro Devices — The chipmaker’s shares declined 7.4% in reaction to its second-quarter earnings release on Tuesday after the bell. While the company posted better-than-expected earnings in the prior quarter, its forecast for the third quarter was weaker than analyst estimates amid a weak PC market. Several Wall Street firms, including Bank of America and JPMorgan, said that the company may be nearing the peak of its rally.

    Humana — Shares popped 6% after the health insurer reported second-quarter adjusted earnings per share of $8.94, topping the $8.76 per share anticipated by analysts, per StreetAccount. Humana forecasted its Medicare Advantage business will grow by about 825,000 members in 2023.

    Generac — Shares dropped nearly 24% after the company posted a second-quarter earnings miss. Adjusted earnings per share came in at $1.08, versus StreetAccount’s estimate of $1.16. The company also lowered its forecast for residential product sales in the second half, citing a softer-than-expected consumer environment.

    Scotts Miracle-Gro — The stock sank 18% after the maker of consumer lawn, garden and pest control products reported an earnings and revenue miss for its third quarter. Scotts also forecast a bigger-than-expected revenue decline for the fiscal 2023 year.

    Freshworks — Shares popped nearly 19% after the software-as-a-service company beat expectations for both earnings and revenue. Canaccord Genuity upgraded the stock to buy from hold and hiked its price target to$25 from $15, suggesting 37% upside from Tuesday’s close.

    Robinhood — The retail brokerage’s stock shed more than 4% ahead of the company’s quarterly results, due after the bell. Analysts are expecting a quarterly loss of 1 cent, according to StreetAccount.

    Paycom Software — Shares tumbled 18.6% despite the payroll provider’s earnings and revenue beat after the bell Tuesday. However, the company’s revenue guidance for the third quarter was $410 million to $412 million, compared to the $412 million expected from analysts polled by StreetAccount.

    Chinese tech stocks — Shares of Chinese technology stocks dropped after regulators in China proposed limits on smartphone use for minors. U.S.-listed shares of JD.com, Baidu, Alibaba and Tencent Music were all down roughly 5%.

    — CNBC’s Hakyung Kim, Pia Singh and Alex Harring contributed reporting.

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  • Tupperware and Yellow have skyrocketed, but don’t confuse them with meme stocks

    Tupperware and Yellow have skyrocketed, but don’t confuse them with meme stocks

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    All eyes have been on shares of Tupperware Brands Corp. and Yellow Corp. in recent days as the stocks have soared despite a dearth of fresh news in the case of the former, and negative news in the case of the latter.

    Shares of the beleaguered maker of iconic food-storage containers enjoyed a record 434% gain in July on no apparent news. Yellow’s stock
    YELL,
    -26.15%
    has also skyrocketed, despite reports that the trucking company is facing bankruptcy.

    Over the weekend the Wall Street Journal reported that the less-than-truckload company has shut down operations as it prepares for bankruptcy. On Monday the International Brotherhood of Teamsters said it was served legal notice that Yellow was “ceasing operations and filing for bankruptcy.” MarketWatch has reached out to Yellow with a request for comment.

    Related: How ‘left-for-dead’ Tupperware became a buzzy trading play

    Set against this backdrop, the surging share prices for Tupperware
    TUP,
    -25.99%
    and Yellow have sparked comparisons with the meme stock phenomenon, where discussions on social media can send share prices surging. This trend turned companies such as AMC Entertainment Holdings Inc.
    AMC,
    -3.45%
    and GameStop Corp.
    GME,
    -4.42%
    into meme stock “darlings” in recent years. But Samantha LaDuc, founder of LaDucTrading.com, says there’s a different explanation for what’s been happening to shares of Tupperware and Yellow.

    “Literally, it’s short covering, as the paired trade of long quality, short junk unwinds,” she told MarketWatch, via email. “And it typically always precedes volatility.”

    Short selling of a stock occurs when an investor borrows shares and sells them immediately expecting the price to drop. The shares can then be repurchased and returned to the lender, with the investor pocketing the difference. Although sometimes vilified, short sellers are actually misunderstood, Robert Sloan, managing partner at financial analytics firm S3 Partners and author of “Don’t Blame the Shorts,” recently told MarketWatch.

    Related: Short selling stocks — and trying to play short squeezes — can be very dangerous

    In a letter to investors this week, Dan Loeb, the chief executive of the hedge-fund firm Third Point, explained that short selling is much more challenging today than it has been historically.

    “Fundamental analysis is increasingly taking a back seat to monitoring daily option expiries and Reddit message boards, as evidenced by the numerous short squeezes and manipulations of heavily shorted stocks such as AMC and GameStop in 2021 and others this year,” he wrote. “While we have not abandoned short selling, we continue to reduce our single-name short exposure in favor of market hedges and short baskets.”

    LaDuc explained that in June and July hedge funds aggressively covered shorts in global equities, and also noted the trend of FOMO, or fear of missing out.

    “We have had the largest six-month increase in leverage on record (according to Goldman), with a clear case of FOMO-the-MOMO [momentum] chase in full view as concentration risk in megacap tech forced a NASDAQ “SPECIAL REBALANCE” to ‘down-weight’ AAPL, MSFT, GOOGL etc.”

    Related: Short sellers are not evil, but they are misunderstood

    Short covering occurs when a person with a short position buys back the shares, ending the short trade, and returns the shares to the seller. With this strategy, the short seller aims to cover after the share price falls and make a profit. They may also cover if the price goes up to limit their losses.

    Last week LaDuc told MarketWatch how she was able to anticipate a Tupperware stock spike despite a dearth of traditional market-moving news around the name.

    Tupperware’s stock has continued its upward trajectory, rocketing again on Tuesday. The stock eventually ended Tuesday’s session up 26% at $5.38, with LaDuc warning her clients of the risks involved in a parabolic rally. “I suggested to clients it was likely done and to be very cautious if still long because ‘Parabolas are trapped longs that can trigger volatility which can trigger a liquidation event’.”

    Related: Yellow’s stock quadruples in 2 days even after reports that bankruptcy is coming

    Shares of Tupperware are down 23.2% Wednesday. Yellow Corp.’s stock, which ended Tuesday’s session up 121.6%, is down 17.3% Wednesday.

    With regard to Yellow Corp. LaDuc attributes its recent stock movements to insider and Wall Street manipulation. “Low priced, low-float stocks are VERY easy to push around,” she told MarketWatch.

    Bankrupt companies such as Bed Bath & Beyond Inc.
    BBBYQ,
    +1.46%
    have even proven attractive to some investors recently, sparking comparisons with the meme stock phenomenon.

    “They are clearly retail investors, largely on the Robinhood 
    HOOD,
    -4.16%
     platform, that are readers of Reddit,” Howard Ehrenberg, a bankruptcy and reorganization practice partner at law firm Greenspoon Marder, told MarketWatch last month. “They are people buying on rumor and hoping that by participating in a mass purchase binge, they will make money.”

    Related: Tupperware stock skyrockets to a record 434% gain in July

    Hertz Global Holdings Inc.
    HTZ,
    -1.73%    ,
    which filed for bankruptcy protection in 2020 and exited bankruptcy the following year, also fueled meme-stock comparisons, when mostly retail investors piled into the stock during the bankruptcy process.

    Typically in a bankruptcy, shareholders are wiped out as creditors take control of the remaining assets. But those investors were rewarded when the company got a big capital injection and was able to resume trading on an exchange.

    The investor behavior around these types of stocks has caught the attention of academics. Victor Ricciardi, visiting finance faculty at Tennessee Tech University and co-author of the new book “Advanced Introduction to Behavioral Finance,” recently described some of the behaviors that can prompt investors to purchase bankrupt stocks.

    “Representativeness bias refers to when past performance influences how an individual perceives an investment,” Ricciardi told MarketWatch via email last month. “In particular, a person makes a general assumption about a small sample of information or experience.”

    Related: Why investors gamble on shares of bankrupt companies — Bed Bath & Beyond, for example

    So, for example, if a person made a substantial gain from a previous bankrupt stock they might conclude that all bankrupt stocks result in investment gains, according to Ricciardi. There are also parallels with gambling.

    “The notion of the long shot bias is based on the tendency for people to overweight the probability of a long shot bet paying off, especially in horse racing and lotteries,” Ricciardi added. “This is driven by overconfident behavior and dreams of becoming a millionaire overnight.”

    Tupperware’s stock has risen 250.6% in the last three months, while Yellow shares have climbed 84.3%.

    Tomi Kilgore and Phil van Doorn contributed to this report.

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  • Why Charles Schwab became a financial ‘supermarket’

    Why Charles Schwab became a financial ‘supermarket’

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    Charles Schwab Corp. is the largest publicly traded brokerage business in the United States with $7.5 trillion of client assets, and is a leading service provider for financial advisors, among the top exchange-traded fund asset managers and one of the biggest banks.

    “It would be fair to characterize Charles Schwab as a financial services supermarket,” Michael Wong, director of North American equity research and financial services at Morningstar, told CNBC. “Anything that you want, you can find in Charles Schwab’s platform.”

    Over the decades, Charles Schwab helped usher in a low-cost investing revolution while surviving market crashes and fierce competition — even when the game was taken up a notch to zero-fee commissions in 2019. 

    “Inherently, this is a scale business. The larger you are, the more efficient you are from an expense perspective,” Alex Fitch, portfolio manager for the Oakmark Select Fund and the Oakmark Equity and Income Fund, which invests in Charles Schwab, told CNBC. “It enables you to cut prices.”

    Various facets of Charles Schwab’s business compete against many legacy full-service brokers and investment bankers, including Fidelity, Edward Jones, Interactive Brokers, Stifel, JPMorgan, Morgan Stanley and UBS. And, it has to battle in the financial tech market against companies like Robinhood, Ally Financial and SoFi. 

    The melee reached a turning point in 2019 when Charles Schwab announced it was slashing commissions for stock, ETF and options trades to zero, matching the fees offered by Robinhood when it entered the market in 2014.

    Quickly, other companies followed suit and cut fees, which damaged TD Ameritrade’s business enough that Charles Schwab ended up acquiring it in a $26 billion all-stock deal less two months later.

    Charles Schwab was among the firms that benefited from the growth of retail investing during the coronavirus pandemic, and it’s now facing the consequences of Federal Reserve’s aggressive interest rate hikes. 

    That’s because of Charles Schwab’s huge banking business that generates revenue from sweep accounts, which are when the firm uses money leftover in investors’ portfolios and reinvests it in securities, like government bonds, to help turn a profit. 

    Charles Schwab told CNBC it was unable to participate in this documentary.

    Watch the video above to learn more about how Charles Schwab battled the ever-evolving financial services market – from fees to fintech – and how the reward doesn’t come without the risk. 

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  • Crypto tokens plunged this week after Gensler stepped up SEC crackdown

    Crypto tokens plunged this week after Gensler stepped up SEC crackdown

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    Gary Gensler, Chair of the U.S. Securities and Exchange Commission, takes his seat before the start of the Senate Banking, Housing, and Urban Affairs Committee hearing on Oversight of the U.S. Securities and Exchange Commission on Tuesday, Sept. 14, 2021.

    Bill Clark | CQ-Roll Call, Inc. | Getty Images

    SEC Chair Gary Gensler stepped up his attack on the crypto industry this week, suing Coinbase and Binance for securities violations and casting doubt on the future of token trading.

    Crypto investors took the hint. Four of the 10 most valuable coins plunged in value by at least 15% this week, according to CoinMarketCap, a sell-off sparked by the lawsuits and Gensler’s interview with CNBC on Tuesday, in which he said “we don’t need more digital currency.”

    In alleging that Coinbase was acting as an unregistered broker and exchange, the Securities and Exchange Commission said at least 13 crypto assets available to the company’s customers were considered “crypto asset securities.” They include Solana’s SOL token, Cardano’s ADA token, Polygon’s MATIC coin and Protocol Labs’ Filecoin token (FIL).

    Trading app Robinhood followed on Friday by announcing that, starting June 27, it will no longer support trading of coins from Cardano, Polygon and Solana. The company said “no other coins are affected.” Also on Friday, Crypto.com said it will shut down its U.S. institutional exchange.

    “No other coins are affected and your crypto is still safe on Robinhood,” the company said in a post.

    Cardano’s coin, the seventh-most valuable cryptocurrency, according to CoinMarketCap, tumbled 20% in the past week. Solana, ranked ninth, dropped 18%. Polygon, ranked 10th, also slid 18%. Filecoin, which is further down the list, dropped 19%. Binance’s BNB token, ranked fourth, fell 16%.

    Bitcoin and ethereum, the two most popular cryptocurrencies, were more stable, each declining less than 5%.

    Gensler, who was appointed to head the SEC by President Joe Biden in 2021, has spent much of the past year going after crypto firms and exchanges for effectively selling highly speculative and risky securities dressed up as something else.

    From high-profile fraud cases involving Sam Bankman-Fried’s FTX and Do Kwon’s Terraform Labs to dozens of charges involving coin offerings and alleged false marketing, Gensler has made the once-burgeoning crypto industry his primary takedown target.

    “The investing public has the benefit of U.S. securities laws,” Gensler said in an interview with CNBC’s “Squawk on the Street” on Tuesday. “Crypto should be no different, and these platforms, these intermediaries need to come into compliance.”

    Gensler’s TV appearance came after the SEC sued Coinbase and said the company should be “permanently restrained and enjoined” from “operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency.”

    Shares of Coinbase, the only major crypto exchange that’s publicly traded in the U.S., sank 18% this week. Coinbase legal chief Paul Grewal told CNBC in a statement that the SEC’s approach to enforcement without laying out clear rules is “hurting America’s economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance.”

    A day earlier, in its lawsuit against Binance, the SEC alleged that the company and founder Changpeng Zhao comingled billions of dollars worth of user funds and sent them to a European company controlled by Zhao.

    While Binance claims no official headquarters and does most of its business overseas, the SEC’s complaint cited a senior executive allegedly telling a compliance officer that the company was operating as a “[f—ing] unlicensed securities exchange in the USA bro.”

    In a blog post, Binance said it was “disappointed” in the SEC’s suit and said it had “engaged in extensive good-faith discussions to reach a negotiated settlement to resolve their investigations.”

    Others named in the SEC lawsuit also weighed in after this week’s charges landed.

    The Cardano Foundation, which works to advance use of its namesake technology, said in a tweet that it disagrees with the labeling of its ADA coin as a security and “we look forward to the continued engagement with regulators and policymakers to achieve legal clarity and certainty on these matters.”

    Protocol Labs, the developer of Filecoin, said in a series of tweets on Thursday that the token is critical to the operation of its distributed storage network. It’s how people buy storage from providers, and Protocol says the cost is much less than what users would pay Amazon Web Services or Google Cloud.

    “Filecoin is a cryptocurrency-powered global storage network preserving humanity’s most important information, not a security,” Protocol Labs tweeted.

    In its 101-page complaint against Coinbase, the SEC made clear that regardless of whether these tokens have some level of utility, they can easily be purchased on the app by people who have no interest beyond investing. And Coinbase generates revenue by executing those trades.

    “Coinbase makes these crypto assets available for trading,” the SEC said, “without restricting transactions to those who might acquire or treat the asset as anything other than as an investment.”

    WATCH: Ethereum, bitcoin communities descent on Prague

    Ethereum, Bitcoin communities descend on Prague as U.S. crackdown grips crypto market

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  • Apple and fintechs like Robinhood chase yield-hungry depositors as Fed rate hikes continue

    Apple and fintechs like Robinhood chase yield-hungry depositors as Fed rate hikes continue

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    Upgrade CEO Renaud Laplanche speaks at a conference in Brooklyn, New York, in 2018.

    Alex Flynn | Bloomberg via Getty Images

    The technology industry is known for innovation and spawning the next big thing. But at a time of economic uncertainty and rising interest rates, a growing piece of the tech sector is going after one of the most noninnovative products on the planet: yield.

    With U.S. Treasury yields climbing late last year to their highest in more than a decade, consumers and investors can finally generate returns just by parking their money in savings accounts.

    Banks are responding by offering higher-yielding offerings. American Express, for example, offers consumers a 3.75% annual percentage yield (APY), and First Citizens‘ CIT Bank has a 4.75% APY for customers with at least $5,000 in deposits. Ally Bank, which is online only, is promoting a 4.8% certificate of deposit.

    However, some of the highest rates available to savers aren’t coming from traditional financial firms or credit unions, but rather from companies in and around Silicon Valley.

    Apple is the most notable new entrant. Last month, the iPhone maker launched its Apple Card savings account with a generous 4.15% APY in partnership with Wall Street giant Goldman Sachs.

    Then there’s the whole fintech market, consisting of companies offering consumer financial services with a focus on digital products and a friendly mobile experience instead of physical branches with costly bank tellers and loan officers.

    Stock trading app Robinhood has a feature called Robinhood Gold, which offers 4.65% APY. Interest is earned on uninvested cash swept from the client’s brokerage account to partner banks. It’s part of a $5-a-month subscription that also includes lower borrowing costs for margin investing and research for stock investing.

    The company lifted its yield from 4.4% on Wednesday after the Federal Reserve approved its 10th rate increase in a little more than a year, raising its benchmark borrowing rate by 0.25 percentage point to a target range of 5%-5.25%.

    Fed Chair Jerome Powell speaks during a conference at the Federal Reserve Bank of Chicago on June 4, 2019.

    Scott Olson | Getty Images

    “At Robinhood, we’re always looking for ways to help our customers make their money work for them,” the company said in a press release announcing its hike.

    LendingClub, an online lender, is promoting an account with a 4.25% yield. The company told CNBC that deposit growth was up 13% for the first quarter of 2023 compared with the prior quarter, “as depositors looked to diversify their money out of traditional banks and earn increased savings.” Year over year, savings deposits have increased by 81%.

    And Upgrade, which is led by LendingClub founder Renaud Laplanche, offers 4.56% for customers with a minimum balance of $1,000.

    “It’s really a trade-off for consumers, between safety or the appearance of safety, and yield,” Laplanche told CNBC. Upgrade, which is based in San Francisco, and most other fintech players keep customer deposits with institutions backed by the Federal Deposit Insurance Corp., so consumer funds are safe up to the $250,000 threshold.

    SoFi is the rare example of a fintech with a banking charter, which it acquired last year. It offers a high-yield savings product with a 4.2% APY.

    The story isn’t just about rising interest rates.

    Across the emerging fintech spectrum, companies like Upgrade are, intentionally or not, taking advantage of a moment of upheaval in traditional finance. On Monday, First Republic became the third American bank to fail since March, following the collapses of Silicon Valley Bank and Signature Bank. All three saw depositors rush for the exits as concerns about a liquidity crunch led to a cycle of doom.

    Shares of PacWest and other regional banks have plummeted this week, even after First Republic’s orchestrated sale to JPMorgan Chase was meant to signal stability in the system.

    After the collapse of SVB, Laplanche said Upgrade’s banking partners came to the company and asked it to step up the inflow of funds, an apparent effort to stanch the withdrawals at smaller banks. Upgrade farms out the money it attracts to a network of 200 small- and medium-sized banks and credit unions that pay the company for the deposits.

    Used to be dead money

    For well over a decade, before the recent jump in rates, savings accounts were dead money. Borrowing rates were so low that banks couldn’t profitably offer yield on deposits. Also, stocks were on such a tear that investors were doing just fine in equities and index funds. A subset of those with a stomach for risk went big in crypto.

    As the price of bitcoin soared, a number of crypto exchanges and lenders began mimicking the banks’ savings model, offering very high yield (up to 20% annually) for investors to store their crypto. Those exchanges are now bankrupt following the crypto industry’s meltdown last year, and many thousands of clients lost their funds.

    There is some potential instability for fintechs, even those outside of the crypto space. Many of them, including Upgrade and Affirm, partner with Cross River Bank, which serves as the regulated bank for companies that don’t have charters, allowing them to offer lending and credit products.

    Last week, Cross River was hit with a consent order from the FDIC for what the agency called “unsafe or unsound banking practices.”

    Cross River said in a statement that the order was focused on fair lending issues that occurred in 2021, and that it “places no limitations on our extensive existing fintech partnerships or the credit products we presently offer in partnership with them.”

    While fintechs broadly are under far less regulatory pressure than crypto companies, the FDIC’s action suggests that regulators are beginning to pay closer attention to the kinds of products that high-yield accounts are designed to complement.

    Still, the emerging group of high-yield savings products are much more mainstream than what the crypto platforms were promoting. That’s largely because the deposits come with government-backed insurance protections, which have a long history of safety.

    They’re also not designed to be big profit centers. Rather, by offering high yields for consumers who have long housed their money in stagnant accounts, tech and fintech companies are opening the door to potentially new customers.

    Apple has a whole suite of financial products, including a credit card and payments app, that pair smoothly with the savings account, which is only available to the 6 million-plus Apple Card holders. Those customers reportedly put in nearly $1 billion in deposits in the first four days the service was on the market.

    Apple didn’t respond to a request for comment. CEO Tim Cook said on the company’s earnings call Thursday that, “we are very pleased with the initial response on it. It’s been incredible.”

    Apple savings account

    Apple

    Robinhood, meanwhile, wants more people to use its trading platform, and companies like LendingClub and SoFi are building relationships with potential borrowers.

    Laplanche said high-yield savings accounts, while compelling for the consumer, aren’t core to most fintech businesses but serve as an onboarding tool to more lucrative products, like consumer lending or conventional credit cards.

    “We started with credit,” Laplanche said. “We think that’s a better strategy.”

    SoFi launched its high-yield savings account in February of last year. In its annual SEC filing, the company said that offering checking and high-yield savings accounts provided “more daily interactions with our members.”

    Affirm, best known as a buy now, pay later firm, has offered a savings account since 2020 as part of a “full suite” of financial products. Its yield is currently 3.75%.

    “Consumers can use our app to manage payments, open a high-yield savings account, and access a personalized marketplace,” the company said in a 2022 SEC filing. A spokesperson for Affirm told CNBC that the saving account is “one of the many solutions in our suite of products that empower consumers with a smarter way to manage their finances.”

    Set against the backdrop of a regional banking crisis, savings products from anywhere but a national bank might seem unappealing. But chasing yield does come with at least a little bit of risk.

    “Citi or Chase, feels like it’s safe,” to the consumer, Laplanche said. “Apple and Goldman aren’t inherently risky, but it’s not the same as Chase.”

    — CNBC’s Darla Mercado contributed to this report.

    WATCH: Consumers are spending more for the same items than they were a year ago

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  • March’s bank failures show options can be tricky even when retail traders pick big winners

    March’s bank failures show options can be tricky even when retail traders pick big winners

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    A woman leaves a Signature Bank branch on March 13, 2023 in New York City. The bank was closed by regulators Sunday.

    Leonardo Munoz | View Press | Corbis News | Getty Images

    The sudden failures of Silicon Valley Bank and Signature Bank last month created a nervous waiting game for options investors, showing that even winning trades can be risky in the derivatives market. 

    The closures of SVB on March 10 and Signature on March 12 led to halts for the stocks — at $106 per share for SVB and $70 per share for Signature. 

    This halt, and how regulators and brokerage firms handled the outstanding options contracts, turned simple trades into a big headache for retail investors. In some cases, traders had to put up additional cash and take on potential risk or see their timely bets expire worthless.

    This was a problem for even more sophisticated retail traders such as Shaun William Davies, an associate professor of finance at the University of Colorado-Boulder, who had purchased Signature put options on brokerage platform Robinhood with a $50 strike price as a hedge against market volatility.

    A put option gives the holder the right to sell the stock at the strike price and serves as a bet that the stock will go down. A put contract is also attractive because it has limited downside for the holder.

    Logically, that trade should have been a big winner, but Davies’ options were technically out of the money, based on the last traded price — that is, the share price at the time was above his $50 strike price — and the stocks were now illiquid. The put options were set to expire March 17.

    Stock Chart IconStock chart icon

    Shares of Signature Bank were halted for about two weeks in March.

    Davies said that usually he would sell his winning options trades before expiration, so he does not have to deal with the settlement process. But the halt meant that he had to convince Robinhood to open a short position to exercise his options and then allow him to close out the short position whenever the stock began to trade again. 

    The brokerage firm originally told Davies that it would not allow him to open a short position, according to messages with customer support viewed by CNBC. He said there was no mention in the options agreement with Robinhood that highlighted this risk if stocks were halted.

    “In hindsight, I should have bought puts on First Republic or something … First Republic traded all day on Monday [March 13]. I just happened to trade the one that was shut down — which should have been the best hedge, but it turned out to be the worst hedge,” Davies said March 15, when he thought his options would expire before he could exercise them. 

    Robinhood later allowed Davies to create the naked short position and therefore to exercise his option. A Robinhood spokesperson told CNBC that the firm was reaching out to customers individually to help work through the issues. 

    However, there was still a uneasy waiting period for Davies and other traders in his position. The naked short positions showed an on-paper loss in his account until the stock began trading over the counter on March 28. While he had enough cash in his account to cover margin requirements, Davies said he was restricted from doing further trades until the short position was covered.

    Other brokerages

    While some of Davies’ confusion may have been related to Robinhood, the broader issues were not limited to one broker. The Options Clearing Corporation declared that the options should be closed on a broker-to-broker basis, sending investors digging through their options agreements to figure out next steps. 

    Scott Sheridan, the CEO of tastytrade, said the OCC’s decision meant the firm had to work with customers individually to help close out their positions.

    “It’s unusual to see the OCC kind of wash their hands of a situation. They are the judge, the jury and execution for all options-related matters,” he said. 

    Similarly, in a post on Reddit, Fidelity explained that investors who held put options would likely need to call a company representative in order to exercise the put option. Creating the necessary short position would require posting a cash margin of $10 per share, even though Fidelity had marked the price of Signature and SVB down to zero. 

    The trades with simple put options were relatively easier to figure out, but some accounts had put-spread positions that include multiple options and were trickier to unwind, Sheridan said. Some others had short put positions, requiring them to buy the stock at the strike price, which resulted in losses for the traders.

    Additionally, Sheridan said, there are regulatory minimums for margins that brokerages have to impose on short positions and sometimes additional margin is necessary for risk management for the firms — not a way to generate more profit. 

    “Customers never want to hear from a risk margins department, because that means something doesn’t look good to the firm. But there’s a reason firms have risk margins department. You just have to control the business. We had a couple of accounts that were debit, but from my perspective, it was a minor wound for us relative to what was out there,” Sheridan said. 

    Another wrinkle is that some types of accounts, including retirement accounts, are not allowed to hold short positions, which created additional steps for traders and brokers to close out the trade. 

    Lingering uncertainty

    Even once Davies was able to enter his short position against Signature Bank, the stress of the trade did not go away. He said there was concern about whether the stock would begin trading at a higher price as options traders rushed to close out their positions, leaving him with only a small gain or even, in theory, a loss on the trade. 

    “I was super nervous about that, that they would close it out at some ridiculous GameStop-sort of price,” Davies said, referencing the meme-stock craze that caught some retail brokerages off guard in 2021. 

    Eventually, Davies was able to cover his short position at just 20 cents per share — netting a nice profit. But the ordeal made him think back to the basics he preaches to his college students.

    “I have to admit I had my tail between my legs, because I teach derivative securities at CU-Boulder and I teach my students not to trade derivatives and to be passive investors,” Davies said. 

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  • Robinhood accidentally sold short on a meme stock and lost $57 million

    Robinhood accidentally sold short on a meme stock and lost $57 million

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    Robinhood Markets Inc. accidentally sold short on a small stock as it went on a meme-like ride in December, costing the trading app more than the stock’s current market capitalization, executives disclosed Wednesday.

    Cosmos Health Inc.
    COSM,
    +0.80%
    shares nearly tripled and experienced record trading volume more than seven times any previous day on Dec. 16, as online traders looking for heavily shorted companies accused exchanges of not allowing them to sell their shares into the updraft. Robinhood
    HOOD,
    -0.76%
    executives admitted Wednesday that their trading app actually became part of the frenzy, and ended up down $57 million because of it.

    In an earnings call, Robinhood Chief Executive Vlad Tenev noted a “processing error on a corporate action” that was “really disappointing,” leaving Chief Financial Officer Jason Warnick to spell it out.

    “A processing error caused us to sell shares short into the market, and although it was detected quickly, it resulted in a loss of $57 million as we bought back these shares against a rising stock price,” Warnick said.

    When Cosmos Health effected a 1-for-25 reverse stock split that Friday morning in December, just hours after announcing its intentions, trading portals did not appear prepared. As MarketWatch reported on the day, TD Ameritrade publicly told Twitter users that the company had not received the newly issued shares to dole out to their clients as the stock spiked. A Charles Schwab Corp.
    SCHW,
    -0.71%
    spokesperson emailed MarketWatch the next week to say that the distributions were all taken care of as of the end of the next business day, a Monday.

    The stock gains didn’t last through that Monday, though — after reaching as high as $23.84 on the day that Robinhood was apparently buying, they lost it all in after-hours trading and headed even lower after Cosmos Health announced an equity offering.

    Shares closed Wednesday at $5.04, which gives Cosmos Health a market cap of about $53 million, according to FactSet — less than Robinhood executives said they lost on the Dec. 16 trades.

    Robinhood shares were up in after-hours trading Wednesday after the trading app reported a fourth-quarter miss, but said the company would seek to buy back shares sold to disgraced cryptocurrency-exchange founder Sam Bankman-Fried and executives would forego $500 million in stock compensation. Robinhood stock has declined 21.8% in the past 12 months, as the S&P 500 index
    SPX,
    -1.11%
    has dropped 8.9%.

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  • Tech stocks just finished a five-week rally — the longest stretch since market peak in November 2021

    Tech stocks just finished a five-week rally — the longest stretch since market peak in November 2021

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    Tech stocks on display at the Nasdaq.

    Peter Kramer | CNBC

    The Nasdaq just wrapped up its fifth straight week of gains, jumping 3.3% over the last five days. It’s the longest weekly winning streak for the tech-laden index since a stretch that ended in November 2021. Coming off its worst year since 2008, the Nasdaq is up 15% to start 2023.

    The last time tech stocks enjoyed a rally this long, investors were gearing up for electric carmaker Rivian’s blockbuster IPO, the U.S. economy was closing out its strongest year for growth since 1984, and the Nasdaq was trading at a record.

    This time around, there’s far less champagne popping. Cost cuts have replaced growth on Wall Street’s checklist, and tech executives are being celebrated for efficiency over innovation. The IPO market is dead. Layoffs are abundant.

    Earnings reports were the story of the week, with results landing from many of the world’s most valuable tech companies. But the numbers, for the most part, weren’t good.

    Apple missed estimates for the first time since 2016, Facebook parent Meta recorded a third straight quarter of declining revenue, Google‘s core advertising business shrank, and Amazon closed out its weakest year for growth in its 25-year history as a public company.

    While investors had mixed reactions to the individual reports, all four stocks closed the week with solid gains, as did Microsoft, which reported earnings the prior week and issued lackluster guidance in projecting revenue growth this quarter of only about 3%.

    Cost control is king

    Meta was the top performer among the group this week, with the stock soaring 23%, its third-best week ever. In its earnings report Wednesday, revenue came in slightly above estimates, even with sales down year over year, and the first-quarter forecast was roughly in line with expectations.

    The key to the rally was CEO Mark Zuckerberg’s pronouncement in the earnings statement that 2023 would be the “Year of Efficiency” and his promise that “we’re focused on becoming a stronger and more nimble organization.”

    “That was really the game-changer,” Stephanie Link, chief investment strategist at Hightower Advisors, said in an interview Friday with CNBC’s “Squawk Box.”

    “The quarter itself was OK, but it was the cost-cutting that they finally got religion on, and that’s why I think Meta really took off,” she said.

    Zuckerberg acknowledged that the times are changing. From the year of its IPO in 2012 through 2021, the company grew between 22% and 58% a year. But in 2022 revenue fell 1%, and analysts expect growth of only 5% in 2023, according to Refinitiv.

    On the earnings call, Zuckerberg said he doesn’t expect declines to continue, “but I also don’t think it’s going to go back to the way it was before.” Meta announced in November the elimination of 11,000 jobs, or 13% of its workforce.

    Link said the reason Meta’s stock got such a big bounce after earnings was because “expectations were so low and the valuation was so compelling.” The stock lost almost two-thirds of its value last year, far more than its mega-cap peers.

    Navigating ‘a very difficult environment’

    Apple, which slid 27% last year, gained 6.2% this week despite reporting its steepest drop in revenue in seven years. CEO Tim Cook said results were hurt by a strong dollar, production issues in China affecting the iPhone 14 Pro and iPhone 14 Pro Max, and the overall macroeconomic environment. 

    “Apple is navigating what is, of course, a very difficult environment quite well overall,” Dan Flax, an analyst at Neuberger Berman, told “Squawk Box” on Friday. “As we move through the coming months and quarters, we’ll see a return to growth and the market will begin to discount that. We continue to like the name even in the face of these macro challenges.”

    Watch CNBC's full interview with Neuberger Berman's Dan Flax

    Amazon CEO Andy Jassy, who succeeded Jeff Bezos in mid-2021, took the unusual step of joining the earnings call with analysts Thursday after his company issued a weaker-than-expected forecast for the first quarter. In January, Amazon began layoffs, which are expected to result in the loss of more than 18,000 jobs.

    “Given this last quarter was the end of my first full year in this role and given some of the unusual parts in the economy and our business, I thought this might be a good one to join,” Jassy said on the call.

    Managing expenses has become a big theme for Amazon, which expanded rapidly during the pandemic and subsequently admitted that it hired too many people during that period.

    “We’re working really hard to streamline our costs,” Jassy said.

    Alphabet is also in downsizing mode. The company announced last month that it’s slashing 12,000 jobs. Its revenue miss for the fourth quarter included disappointing sales at YouTube from a pullback in ad spending and weakness in the cloud division as businesses tighten their belts.

    Ruth Porat, Alphabet’s finance chief, told CNBC’s Deirdre Bosa that the company is meaningfully slowing the pace of hiring in an effort to deliver long-term profitable growth.

    Alphabet shares ended the week up 5.4% even after giving up some of their gains during Friday’s sell-off. The stock is now up 19% for the year.

    Ruth Porat, Alphabet CFO, at the WEF in Davos, Switzerland on May 23rd, 2022. 

    Adam Galica | CNBC

    Should the Nasdaq continue its upward trend and notch a sixth week of gains, it would match the longest rally since a stretch that ended in January 2020, just before the Covid pandemic hit the U.S.

    Investors will now turn to earnings reports from smaller companies. Some of the names they’ll hear from next week include Pinterest, Robinhood, Affirm and Cloudflare.

    Another area in tech that flourished this week was the semiconductor space. Similar to the consumer tech companies, there wasn’t much by way of growth to excite Wall Street.

    AMD on Tuesday beat on sales and profit but guided analysts to a 10% year-over-year decline in revenue for the current quarter. Intel, AMD’s primary competitor, reported a disastrous quarter last week and projected a 40% decline in sales in the March quarter.

    Still, AMD jumped 14% for the week and Intel rose almost 8%. Texas Instruments and Nvidia also notched nice gains.

    The semiconductor industry is dealing with a glut of extra parts at PC and server makers and falling prices for components such as memory and central processors. But after a miserable year in 2022, the stocks are rebounding on signs that an easing of Federal Reserve rate increases and lightening inflation numbers will give the companies a boost later this year.

    WATCH: Watch CNBC’s full interview with Truist’s Youssef Squali

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  • Microsoft, Amazon and other tech companies have laid off more than 60,000 employees in the last year

    Microsoft, Amazon and other tech companies have laid off more than 60,000 employees in the last year

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    Microsoft CEO Satya Nadella speaks at the company’s Ignite Spotlight event in Seoul on Nov. 15, 2022.

    SeongJoon Cho | Bloomberg | Getty Images

    The job cuts in tech land are piling up, as companies that led the 10-year bull market adapt to a new reality.

    Microsoft said Wednesday that it’s letting go of 10,000 employees, which will reduce the company’s headcount by less than 5%. Amazon also began a fresh round of job cuts that are expected to eliminate more than 18,000 employees and become the largest workforce reduction in the e-retailer’s 28-year history.

    The layoffs come in a period of slowing growth, higher interest rates to battle inflation, and fears of a possible recession next year.

    Here are some of the major cuts in the tech industry so far. All numbers are approximations based on filings, public statements and media reports:

    Microsoft: 10,000 jobs cut

    Microsoft is reducing 10,000 workers through March 31 as the software maker braces for slower revenue growth. The company also is taking a $1.2 billion charge.

    “I’m confident that Microsoft will emerge from this stronger and more competitive,” CEO Satya Nadella announced in a memo to employees that was posted on the company website Wednesday. Some employees will find out this week if they’re losing their jobs, he wrote.

    Amazon: 18,000 jobs cut

    Earlier this month, Amazon CEO Andy Jassy said the company was planning to lay off more than 18,000 employees, primarily in its human resources and stores divisions. It came after Amazon said in November it was looking to cut staff, including in its devices and recruiting organizations. CNBC reported at the time that the company was looking to lay off about 10,000 employees.

    Amazon went on a hiring spree during the Covid-19 pandemic. The company’s global workforce swelled to more than 1.6 million by the end of 2021, up from 798,000 in the fourth quarter of 2019.

    Alphabet (Verily): 230 jobs cut

    Google parent company Alphabet had largely avoided layoffs until January, when it cut 15% of employees from Verily, its health sciences division. Google itself has not undertaken any significant layoffs as of Jan. 18, but employees are increasingly growing worried that the ax may soon fall.

    Crypto.com: 500 jobs cut

    Crypto.com announced plans to lay off 20% of its workforce Jan. 13. The company had 2,450 employees, according to PitchBook data, suggesting around 490 employees were laid off. 

    CEO Kris Marszalek said in a blog post that the crypto exchange grew “ambitiously” but was unable to weather the collapse of Sam Bankman-Fried’s crypto empire FTX without the further cuts.

    “All impacted personnel have already been notified,” Marszalek said in a post.

    Coinbase: 2,000 jobs cut

    On Jan. 10, Coinbase announced plans to cut about a fifth of its workforce as it looks to preserve cash during the crypto market downturn.

    The exchange plans to cut 950 jobs, according to a blog post. Coinbase, which had roughly 4,700 employees as of the end of September, had already slashed 18% of its workforce in June saying it needed to manage costs after growing “too quickly” during the bull market.

    “With perfect hindsight, looking back, we should have done more,” CEO Brian Armstrong told CNBC in a phone interview at the time. “The best you can do is react quickly once information becomes available, and that’s what we’re doing in this case.”

    Salesforce: 7,000 jobs cut

    Salesforce is cutting 10% of its personnel and reducing some office space as part of a restructuring plan, the company announced Jan. 4. It employed more than 79,000 workers as of December.

    In a letter to employees, co-CEO Marc Benioff said customers have been more “measured” in their purchasing decisions given the challenging macroeconomic environment, which led Salesforce to make the “very difficult decision” to lay off workers.

    Salesforce said it will record charges of $1 billion to $1.4 billion related to the headcount reductions, and $450 million to $650 million related to the office space reductions.

    Meta: 11,000 jobs cut

    Facebook parent Meta announced its most significant round of layoffs ever in November. The company said it plans to eliminate 13% of its staff, which amounts to more than 11,000 employees.

    Meta‘s disappointing guidance for the fourth quarter of 2022 wiped out one-fourth of the company’s market cap and pushed the stock to its lowest level since 2016.

    The tech giant’s cuts come after it expanded headcount by about 60% during the pandemic. The business has been hurt by competition from rivals such as TikTok, a broad slowdown in online ad spending and challenges from Apple’s iOS changes.

    Twitter: 3,700 jobs cut

    Lyft: 700 jobs cut 

    Lyft announced in November that it cut 13% of its staff, or about 700 jobs. In a letter to employees, CEO Logan Green and President John Zimmer pointed to “a probable recession sometime in the next year” and rising ride-share insurance costs.

    For laid-off workers, the ride-hailing company promised 10 weeks of pay, health care coverage through the end of April, accelerated equity vesting for the Nov. 20 vesting date and recruiting assistance. Workers who had been at the company for more than four years will get an extra four weeks of pay, they added.

    Stripe: 1,100 jobs cut

    Online payments giant Stripe announced plans to lay off roughly 14% of its staff, which amounts to about 1,100 employees, in November. 

    CEO Patrick Collison wrote in a memo to staff that the cuts were necessary amid rising inflation, fears of a looming recession, higher interest rates, energy shocks, tighter investment budgets and sparser startup funding. Taken together, these factors signal “that 2022 represents the beginning of a different economic climate,” he said.

    Stripe was valued at $95 billion last year, and reportedly lowered its internal valuation to $74 billion in July.

    Shopify: 1,000 jobs cut

    In July, Shopify announced it laid off 1,000 employees, which equals 10% of its global workforce. 

    In a memo to staff, CEO Tobi Lutke acknowledged he had misjudged how long the pandemic-driven e-commerce boom would last, and said the company is being hit by a broader pullback in online spending. Its stock price is down 78% in 2022.

    Netflix: 450 jobs cut

    Netflix announced two rounds of layoffs. In May, the streaming service eliminated 150 jobs after the company reported its first subscriber loss in a decade. In late June, it announced another 300 layoffs. 

    In a statement to employees, Netflix said, “While we continue to invest significantly in the business, we made these adjustments so that our costs are growing in line with our slower revenue growth.” 

    Snap: 1,000 jobs cut 

    In late August, Snap announced it laid off 20% of its workforce, which equates to over 1,000 employees. 

    Snap CEO Evan Spiegel told employees in a memo that the company needs to restructure its business to deal with its financial challenges. He said the company’s quarterly year-over-year revenue growth rate of 8% “is well below what we were expecting earlier this year.”

    Robinhood: 1,100 jobs cut

    Retail brokerage firm Robinhood slashed 23% of its staff in August, after cutting 9% of its workforce in April. Based on public filings and reports, that amounts to more than 1,100 employees.

    Robinhood CEO Vlad Tenev blamed “deterioration of the macro environment, with inflation at 40-year highs accompanied by a broad crypto market crash.”

    Tesla: 6,000 jobs cut

    In June, Tesla CEO Elon Musk wrote in an email to all employees that the company was cutting 10% of salaried workers. The Wall Street Journal estimated the reductions would affect about 6,000 employees, based on public filings.

    “Tesla will be reducing salaried headcount by 10% as we have become overstaffed in many areas,” Musk wrote. “Note this does not apply to anyone actually building cars, battery packs or installing solar. Hourly headcount will increase.”

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  • The tech IPO market collapsed in 2022, and next year doesn’t look much better

    The tech IPO market collapsed in 2022, and next year doesn’t look much better

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    The Nasdaq MarketSite in New York.

    Michael Nagle | Bloomberg | Getty Images

    Following a record-smashing tech IPO year in 2021 that featured the debuts of electric car maker Rivian, restaurant software company Toast, cloud software vendors GitLab and HashiCorp and stock-trading app Robinhood, 2022 has been a complete dud.

    The only notable tech offering in the U.S. this year was Intel’s spinoff of Mobileye, a 23-year-old company that makes technology for self-driving cars and was publicly traded until its acquisition in 2017. Mobileye raised just under $1 billion, and no other U.S. tech IPO pulled in even $100 million, according to FactSet.

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    In 2021, by contrast, there were at least 10 tech IPOs in the U.S. that raised $1 billion or more, and that doesn’t account for the direct listings of Roblox, Coinbase and Squarespace, which were so well-capitalized they didn’t need to bring in outside cash.

    The narrative completely flipped when the calendar turned, with investors bailing on risk and the promise of future growth, in favor of profitable businesses with balance sheets deemed strong enough to weather an economic downturn and sustained higher interest rates. Pre-IPO companies altered their plans after seeing their public market peers plunge by 50%, 60%, and in some cases, more than 90% from last year’s highs.

    In total, IPO deal proceeds plummeted 94% in 2022 — from $155.8 billion to $8.6 billion — according to Ernst & Young’s IPO report published in mid-December. As of the report’s publication date, the fourth quarter was on pace to be the weakest of the year.

    With the Nasdaq Composite headed for its steepest annual slump since 2008 and its first back-to-back years underperforming the S&P 500 since 2006-2007, tech investors are looking for signs of a bottom.

    But David Trainer, CEO of stock research firm New Constructs, says investors first need to get a grip on reality and get back to valuing emerging tech companies based on fundamentals and not far-out promises.

    As tech IPOs were flying in 2020 and 2021, Trainer was waving the warning flag, putting out detailed reports on software, e-commerce and tech-adjacent companies that were taking their sky-high private market valuations to the public markets. Trainer’s calls appeared comically bearish when the market was soaring, but many of his picks look prescient today, with Robinhood, Rivian and Sweetgreen each down at least 85% from their highs last year.

    “Until we see a persistent return to intelligent capital allocation as the primary driver of investment decisions, I think the IPO market will struggle,” Trainer said in an email. “Once investors focus on fundamentals again, I think the markets can get back to doing what they are supposed to do: support intelligent allocation of capital.”

    Lynn Martin, president of the New York Stock Exchange, told CNBC’s “Squawk on the Street” last week that she’s “optimistic about 2023” because the “backlog has never been stronger,” and that activity will pick up once volatility in the market starts to dissipate.

    NYSE president very optimistic about 2023 public listings: 'Backlogs never been stronger'

    Hangover from last year’s ‘binge drinking’

    For companies in the pipeline, the problem isn’t as simple as overcoming a bear market and volatility. They also have to acknowledge that the valuations they achieved from private investors don’t reflect the change in public market sentiment.

    Companies that were funded over the past few years did so at the tail end of an extended bull run, during which interest rates were at historic lows and tech was driving major changes in the economy. Facebook’s mega IPO in 2012 and the millionaires minted by the likes of Uber, Airbnb, Twilio and Snowflake recycled money back into the tech ecosystem.

    Venture capital firms, meanwhile, raised ever larger funds, competing with a new crop of hedge funds and private equity firms that were pumping so much money into tech that many companies were opting to stay private for longer than they otherwise would.

    Money was plentiful. Financial discipline was not.

    In 2021, VC firms raised $131 billion, topping $100 billion for the first time and marking a second straight year over $80 billion, according to the National Venture Capital Association. The average post-money valuation for VC deals across all stages rose to $360 million in 2021 from about $200 million the prior year, the NVCA said.

    Those valuations are in the rearview mirror, and any companies who raised during that period will have to face up to reality before they go public.

    Some high-valued late-stage startups have already taken their lumps, though they may not be dramatic enough.

    Stripe cut its internal valuation by 28% in July, from $95 billion to $74 billion, the Wall Street Journal reported, citing people familiar with the matter. Checkout.com slashed its valuation this month to $11 billion from $40 billion, according to the Financial Times. Instacart has taken a hit three times, reducing its valuation from $39 billion to $24 billion in May, then to $15 billion in July, and finally to $13 billion in October, according to The Information.

    Klarna, a provider of buy now, pay later technology, suffered perhaps the steepest drop in value among big-name startups. The Stockholm-based company raised financing at a $6.7 billion valuation this year, an 85% discount to its prior valuation of $46 billion.

    “There was a hangover from all the binge drinking in 2021,” said Don Butler, managing director at Thomvest Ventures.

    Butler doesn’t expect the IPO market to get appreciably better in 2023. Ongoing rate hikes by the Federal Reserve are looking more likely to tip the economy into recession, and there are no signs yet that investors are excited to take on risk.

    “What I’m seeing is that companies are looking at weakening b-to-b demand and consumer demand,” Butler said. “That’s going to make for a difficult ’23 as well.”

    Butler also thinks that Silicon Valley has to adapt to a shift away from the growth-first mindset before the IPO market picks up again. That not only means getting more efficient with capital, showing a near-term path to profitability, and reining in hiring expectations, but also requires making structural changes to the way organizations run.

    For example, startups have poured money into human resources in recent years to handle the influx in people and the aggressive recruiting across the industry. There’s far less need for those jobs during a hiring freeze, and in a market that’s seen 150,000 job cuts in 2022, according to tracking website Layoffs.fyi.

    Butler said he expects this “cultural reset” to take a couple more quarters and said, “that makes me remain pessimistic on the IPO market.”

    Cash is king

    One high-priced private company that has maintained its valuation is Databricks, whose software helps customers store and clean up data so employees can analyze and use it.

    Databricks raised $1.6 billion at a $38 billion valuation in August of 2021, near the market’s peak. As of mid-2021, the company was on pace to generate $1 billion in annual revenue, growing 75% year over year. It was on everybody’s list for top IPO candidates coming into the year.

    Databricks CEO Ali Ghodsi isn’t talking about an IPO now, but at least he’s not expressing concerns about his company’s capital position. In fact, he says being private today plays to his advantage.

    “If you’re public, the only thing that matters is cash flow right now and what are you doing every day to increase your cash flow,” Ghodsi told CNBC. “I think it’s short-sighted, but I understand that’s what markets demand right now. We’re not public, so we don’t have to live by that.”

    Ghodsi said Databricks has “a lot of cash,” and even in a “sky is falling” scenario like the dot-com crash of 2000, the company “would be fully financed in a very healthy way without having to raise any money.”

    Snowflake shares in 2022

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    Databricks has avoided layoffs and Ghodsi said the company plans to continue to hire to take advantage of readily available talent.

    “We’re in a unique position, because we’re extremely well-capitalized and we’re private,” Ghodsi said. “We’re going to take an asymmetric strategy with respect to investments.”

    That approach may make Databricks an attractive IPO candidate at some point in the future, but the valuation question remains a lingering concern.

    Snowflake, the closest public market comparison to Databricks, has lost almost two-thirds of its value since peaking in November 2021. Snowflake’s IPO in 2020 was the largest ever in the U.S. for a software company, raising almost $3.9 billion.

    Snowflake’s growth has remained robust. Revenue in the latest quarter soared 67%, beating estimates. Adjusted profit was also better than expectations, and the company said it generated $65 million in free cash flow in the quarter.

    Still, the stock is down almost 20% in the fourth quarter.

    “The sentiment in the market is a little stressed out,” Snowflake CEO Frank Slootman told CNBC’s Jim Cramer after the earnings report on Nov. 30. “People react very strongly. That’s understood, but we live in the real world, and we just go one day at a time, one quarter at a time.”

    — CNBC’s Jordan Novet contributed to this report.

    WATCH: Snowflake CEO on the company’s light guidance

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  • The fintech reckoning is upon us. Here’s what to expect next year

    The fintech reckoning is upon us. Here’s what to expect next year

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    Partygoers with unicorn masks at the Hometown Hangover Cure party in Austin, Texas.

    Harriet Taylor | CNBC

    Bill Harris, former PayPal CEO and veteran entrepreneur, strode onto a Las Vegas stage in late October to declare that his latest startup would help solve Americans’ broken relationship with their finances.

    “People struggle with money,” Harris told CNBC at the time. “We’re trying to bring money into the digital age, to redesign the experience so people can have better control over their money.”

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    But less than a month after the launch of Nirvana Money, which combined a digital bank account with a credit card, Harris abruptly shuttered the Miami-based company and laid off dozens of workers. Surging interest rates and a “recessionary environment” were to blame, he said.

    The reversal is a sign of more carnage to come for the fintech world.

    Many fintech companies — particularly those dealing directly with retail borrowers — will be forced to shut down or sell themselves next year as startups run out of funding, according to investors, founders and investment bankers. Others will accept funding at steep valuation haircuts or onerous terms, which extends the runway but comes with its own risks, they said.

    Top-tier startups that have three to four years of funding can ride out the storm, according to Point72 Ventures partner Pete Casella. Other private companies with a reasonable path to profitability will typically get funding from existing investors. The rest will begin to run out of money in 2023, he said.

    “What ultimately happens is you get into a death spiral,” Casella said. “You can’t get funded and all your best employees start jumping ship because their equity is underwater.”

    ‘Crazy stuff’

    Thousands of startups were created after the 2008 financial crisis as investors plowed billions of dollars into private companies, encouraging founders to attempt to disrupt an entrenched and unpopular industry. In a low interest rate environment, investors sought yield beyond public companies, and traditional venture capitalists began competing with new arrivals from hedge funds, sovereign wealth and family offices.

    The movement shifted into overdrive during the Covid pandemic as years of digital adoption happened in months and central banks flooded the world with money, making companies like Robinhood, Chime and Stripe familiar names with huge valuations. The frenzy peaked in 2021, when fintech companies raised more than $130 billion and minted more than 100 new unicorns, or companies with at least $1 billion in valuation.

    “20% of all VC dollars went into fintech in 2021,” said Stuart Sopp, founder and CEO of digital bank Current. “You just can’t put that much capital behind something in such a short time without crazy stuff happening.”

    The flood of money led to copycat companies getting funded anytime a successful niche was identified, from app-based checking accounts known as neobanks to buy now, pay later entrants. Companies relied on shaky metrics like user growth to raise money at eye-watering valuations, and investors who hesitated on a startup’s round risked missing out as companies doubled and tripled in value within months.

    The thinking: Reel users in with a marketing blitz and then figure out how to make money from them later.

    “We overfunded fintech, no question,” said one founder-turned-VC who declined to be identified speaking candidly. “We don’t need 150 different neobanks, we don’t need 10 different banking-as-a-service providers. And I’ve invested in both” categories, he said.

    One assumption

    The first cracks began to appear in September 2021, when the shares of PayPal, Block and other public fintechs began a long decline. At their peak, the two companies were worth more than the vast majority of financial incumbents. PayPal’s market capitalization was second only to that of JPMorgan Chase. The specter of higher interest rates and the end of a decade-plus-long era of cheap money was enough to deflate their stocks.

    Many private companies created in recent years, especially those lending money to consumers and small businesses, had one central assumption: low interest rates forever, according to TSVC partner Spencer Greene. That assumption met the Federal Reserve’s most aggressive rate-hiking cycle in decades this year.

    “Most fintechs have been losing money for their entire existence, but with the promise of ‘We’re going to pull it off and become profitable,'” Greene said. “That’s the standard startup model; it was true for Tesla and Amazon. But many of them will never be profitable because they were based on faulty assumptions.”

    Even companies that previously raised large amounts of money are struggling now if they are deemed unlikely to become profitable, said Greene.

    “We saw a company that raised $20 million that couldn’t even get a $300,000 bridge loan because their investors told them `We are no longer investing a dime.'” Greene said. “It was unbelievable.”

    Layoffs, down rounds

    All along the private company life cycle, from embryonic startups to pre-IPO companies, the market has reset lower by at least 30% to 50%, according to investors. That follows the decline in public company shares and a few notable private examples, like the 85% discount that Swedish fintech lender Klarna took in a July fundraising.

    Now, as the investment community exhibits a newfound discipline and “tourist” investors are flushed out, the emphasis is on companies that can demonstrate a clear path toward profitability. That is in addition to the previous requirements of high growth in a large addressable market and software-like gross margins, according to veteran fintech investment banker Tommaso Zanobini of Moelis.

    “The real test is, does the company have a trajectory where their cash flow needs are shrinking that gets you there in six or nine months?” Zanobini said. “It’s not, trust me, we’ll be there in a year.”

    As a result, startups are laying off workers and pulling back on marketing to extend their runway. Many founders are holding out hope that the funding environment improves next year, although that is looking increasingly unlikely.

    Neobanks under fire

    As the economy slows further into an expected recession, companies that lend to consumers and small businesses will suffer significantly higher losses for the first time. Even profitable legacy players like Goldman Sachs couldn’t stomach the losses required to create a scaled digital player, pulling back on its fintech ambitions.

    “If loss ratios are increasing in a rate increasing environment on the industry side, it’s really dangerous because your economics on loans can get really out of whack,” said Justin Overdorff of Lightspeed Venture Partners.

    Now, investors and founders are playing a game of trying to determine who will survive the coming downturn. Direct-to-consumer fintechs are generally in the weakest position, several venture investors said.

    “There’s a high correlation between companies that had bad unit economics and consumer businesses that got very large and very famous,” said Point72’s Casella.

    Many of the country’s neobanks “are just not going to survive,” said Pegah Ebrahimi, managing partner of FPV Ventures and a former Morgan Stanley executive. “Everyone thought of them as new banks that would have tech multiples, but they are still banks at the end of the day.”

    Beyond neobanks, most companies that raised money in 2020 and 2021 at nosebleed valuations of 20 to 50 times revenue are in a predicament, according to Oded Zehavi, CEO of Mesh Payments. Even if a company like that doubles revenue from its last round, it will likely have to raise fresh funds at a deep discount, which can be “devastating” for a startup, he said.

    “The boom led to some really surreal investments with valuations that cannot be justified, maybe ever,” Zehavi said. “All of these companies across the world are going to struggle, and they will need to be acquired or shut down in 2023.”

    M&A flood?

    As in previous down cycles, however, there is opportunity. Stronger players will snap up weaker ones through acquisition and emerge from the downturn in a stronger position, where they will enjoy less competition and lower costs for talent and expenses, including marketing.

    “The competitive landscape shifts the most during periods of fear, uncertainty and doubt,” said Kelly Rodriques, CEO of Forge, a trading venue for private company stock. “This is when the bold and the well capitalized will gain.”

    While sellers of private shares have generally been willing to accept bigger valuation discounts as the year went on, the bid-ask spread is still too wide, with many buyers holding out for lower prices, Rodriques said. The logjam could break next year as sellers become more realistic about pricing, he said.

    Bill Harris, co-founder and CEO of Personal Capital

    Source: Personal Capital.

    Eventually, incumbents and well-financed startups will benefit, either by purchasing fintechs outright to accelerate their own development, or picking off their talent as startup workers return to banks and asset managers.

    Though he didn’t let on during an October interview that Nirvana Money would soon be among those to shutter, Harris agreed that the cycle was turning on fintech companies.

    But Harris — founder of nine fintech companies and PayPal’s first CEO — insisted that the best startups would survive and ultimately thrive. The opportunities to disrupt traditional players are too large to ignore, he said.

    “Through good times and bad, great products win,” Harris said. “The best of the existing solutions will come out stronger and new products that are fundamentally better will win as well.”

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