Shares of Robinhood Markets (NASDAQ:HOOD) jumped 14% on Monday after the reports that cryptocurrency exchange FTX is interested in acquiring the trading platform.
But would the acquisition actually help Robinhood in the long term?
Bloomberg Report Denied
According to Bloomberg News, FTX was holding internal discussions over a potential takeover plan, but no official offer has been submitted yet.
However, FTX's Chief Executive Officer Sam Bankman-Fried denied the report shortly afterward. As a result, Robinhood's stock price dipped 1% on Tuesday.
He said:
"We are excited about Robinhood's business prospects and potential ways we could partner with them, and I have always been impressed by the business that Vlad and his team have built. That being said, there are no active M&A conversations with Robinhood."
Bankman-Fried disclosed a 7.6% stake in Robinhood in May but claimed he was not considering the possibility of acquiring the trading app. Robinhood stock consists of dual-class shares that give founders the ability to control 64% of the voting rights. Because of this, it is nearly impossible for any interested party to take over the trading app without their support.
Binance's rival FTX is one of the world's largest digital asset exchanges allowing investors to buy a wide range of popular cryptocurrencies, as well as derivative products and assets traded on spot markets.
Companies founded by Bankman-Fried have been expressing interest in helping some of the struggling crypto firms. FTX recently agreed to give crypto lending firm BlockFi a $250 million in revolving credit. Furthermore, quantitative trading firm Alameda, also founded by Bankman-Fried, provided $500 million in funding to crypto brokerage business Voyager Digital.
FTX's U.S. affiliate announced plans to roll out a stock trading platform earlier this year. Last week, the company bought Embedded Financial Technologies to integrate custody, execution and clearing to its upcoming stock trading marketplace. FTX U.S. is expected to launch the platform by the end of this summer.
Plunging Trading Activity Volumes
After experiencing a boom in 2021 following the meme-stock craze, Robinhood has been having a far more difficult year amid a significant slowdown in retail trading activity. That, coupled with a major sell-off in technology stocks over the past few months, Robinhood shares plummeted more than 50% since the start of the year.
The stock-trading business reported a 43% slump in revenue for the first fiscal quarter to $299 million, relative to the year-ago period. The number of monthly active users (MAUs) was down at 15.9 million from 17.7 million in the same period last year.
Earlier this month, Robinhood stock touched a new low, pushing its market cap below the value of its cash on hand.
Since the initial public offering (IPO) in July last year, Robinhood has seen its market value fall below $6 billion in mid-June. This means the company's market cap was lower than the $6.19 billion of cash and cash equivalents Robinhood has reported in the fiscal Q1.
As a result, two or more Wall Street analysts slashed their price objectives on HOOD two weeks ago after the company reported weaker-than-expected metrics for May due to a major slump in trading and turmoil in the crypto market as the number of monthly active users (MAUs) dropped almost 40% from the year-ago period.
John Heagerty, an analyst at Atlantic Equities, said:
"With customers returning to pre-pandemic behavioral trends and a potential recession ahead, user engagement seems likely to decline further. Plummeting crypto valuations will have a direct impact on both volumes and order value."
The analyst trimmed the price target on Robinhood shares to $5 per share and downgraded the stock's rating to Sell. A day earlier, JPMorgan (NYSE:JPM) analyst Ken Worthington cut his price target for HOOD to $7 from $11.
Meme-stock Trading Frenzy Nearly Killed Robinhood
Last week, the United States House Committee on Financial Services published a report offering a second look into Robinhood amid the meme-stock frenzy from January 2021.
Robinhood saw investor interest skyrocket last year after retail investors led by Redditors started massively buying stocks like Gamestop and AMC, sending their share prices through the roof. However, this surge in interest and a horde of new users also posed an existential risk for Robinhood, which nearly killed off the company.
Consequently, Robinhood was forced to restrict the trading of GameStop (NYSE:GME) and other meme stocks.
In the new report by the House Financial Services Committee, Chairwoman Maxine Waters (NYSE:WAT) provided an extensive analysis of what actually happened with Robinhood. Waters wrote the investigation concluded that financial markets need improved regulation to tackle the controversial business practices that were "uncovered" during the probe. She added:
"Payment for order flow and gamification make it profitable for a new generation of trading apps to push retail investors to make as many trades as possible, making the markets more volatile than ever."
The chairman also characterized Robinhood's business activities as "troubling," arguing that the trading company seeks vigorous growth with no proper risk management strategy in place.
Robinhood also generates revenue through its Gold account offering and interest earned on cash balances, though an overwhelming majority of its income stems from payment for order flow.
Conclusion
Robinhood stock price soared on Monday on a report that crypto trading exchange FTX is holding internal talks about potentially acquiring Robinhood.
Although FTX's founder and Chief Executive denied his company is in M&A talks with Robinhood, shares are holding onto yesterday's gains as investors are increasingly attributing strategic optionality to the share price.