Robinhood Stock Is 23% Cheaper Than When It IPO'd. Does That Make It A Good Bet?

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For stakeholders of Robinhood Markets (NASDAQ: HOOD ), the financial services platform favored by an array of retail investors, it’s been quite a wild ride during the past quarter.

HOOD Weekly TTM

Since July 29, when it debuted on the NASDAQ , shares of the Menlo Park, California-based tech company have been on a slippery slope, slumping increasingly lower—and there's little sign HOOD will recover anytime soon. Shares of the brokerage—a favorite of the meme-stock crowd that turned day-trading into a pandemic-era pastime—have tumbled about 65% from the record high $84 level it hit in August. 

On Friday, the stock closed 5% lower, bringing losses for the week to over 17%. Robinhood Markets has skidded to four straight record lows and, since Nov. 8, hasn’t traded above the $38 price of its July initial public offering.

The Robinhood platform, which revolutionized trading in financial markets during the pandemic with its easy-to-use, no-fee based service, closed at $28.99 on Friday. After a plunge of this magnitude, HOOD may look attractive to many investors, but we continue to advise caution on this trade as there are signs of more weakness ahead.

The major reason behind our bearish call? HOOD has failed to impress in its latest earnings report which was viewed by many as a test for the soundness of its business model. 

Crypto Sales Plunge

Crypto transaction revenue on the platform plunged 78% from the second quarter, while total sales also missed analyst forecasts. Funded accounts totaled 22.4 million as of Sept. 30, a slight decline from the end of the previous quarter. 

This weakness was clear evidence that the platform’s fortunes are closely entwined with a very volatile segment of the market. Retail investors slowed their trading activity following a robust first half, fueled by January’s meme-stock run-up and a subsequent rally in Dogecoin , a virtual currency that was originally created as a joke. 

The company's heavy reliance on this capricious segment of the market shows that Robinhood has a long way to go before it can put itself on a truly solid growth path. That’s the main reason some analysts are advising investors to stay away from this name despite the app's popularity with retail investors.

Deutsche Bank analyst Brian Bedell issued a “sell idea” on the brokerage Friday, saying expectations for growth and profitability are overoptimistic. Bedell wrote in his note:

“The meme stock phenomenon we witnessed en masse earlier in the year was more applicable to Robinhood’s recent customer growth and likely resulted in overestimation of the company’s core fundamentals and growth trajectory.”

Mike Bailey, an analyst at FBB Capital Partners, also voiced similar concerns in a Bloomberg report:

“If this quarter is a hint of what’s to come, in terms of volatility, I would expect sentiment and the valuation multiple to drop. The Robinhood sales miss contrasts with the more favorable trading revenue for the big banks and brokers, which may have led investors to anticipate higher trading volumes for Robinhood.”

The trading environment may remain muted through year-end, Robinhood said in the statement last month, forecasting that fourth-quarter revenue may be less than $325 million. 

Bottom Line

Robinhood's latest earnings create doubts about the platform’s ability to generate competitive margins, given its massive focus on small accounts that have limited room to provide sustainable long-term growth. For this reason, we don’t see value in this name despite its steep fall since the IPO.

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