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

By Investing.com (Haris Anwar/Investing.com)Stock MarketsNov 22, 2021 09:34AM ET
www.investing.com/analysis/robinhood-stock-is-23-cheaper-than-when-it-ipod-does-that-make-it-a-good-bet-200609081
Robinhood Stock Is 23% Cheaper Than When It IPO'd. Does That Make It A Good Bet?
By Investing.com (Haris Anwar/Investing.com)   |  Nov 22, 2021 09:34AM ET
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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
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.

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

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

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Comments (7)
Joseph Paulinus
Joseph Paulinus Nov 23, 2021 8:13AM ET
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like to join dis group
Options Trader
Options Trader Nov 23, 2021 12:24AM ET
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Buying here
Isaac Isaac
Isaac Isaac Nov 23, 2021 12:24AM ET
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sorry I don't really understand the investment
Amie Inconnue
Amie Inconnue Nov 22, 2021 8:39PM ET
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Thank you for the analysis, Haris Anwar! I would like to add something from the user's point of view. I'm preparing broker review, and I'm actively using 10 major brokers + Coinbase. All of them have their unique strengths, but so far, I found Robinhood the most convenient and intuitive for simple active trading and monitoring, especially when it comes to mobile version. No-fee structure makes everything much easier, too. For as long as I'm using that broker, it keeps improving. Allocation of shares pre-IPO is a great advantage, as is fractional share trading with little limitations. There is a lot I could say about that broker, and most things would be positive. One major weakness is that RH caters better for small investors, while rich people bring their money to TDA, Fidelity, or Vanguard. But I wouldn't underestimate RH popularity among young people, and with time, there will be strength in numbers.
Brij Singh
Brij Singh Nov 22, 2021 7:09PM ET
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No chance to recover soon.
Nick Fernando
Nick Fernando Nov 22, 2021 3:38PM ET
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continue to fall , You are no longer Robinhood lol
Mox Mox
Mox Mox Nov 22, 2021 2:53PM ET
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penny stock next year. out of business soon after. as soon as the next crisis hits a d people stop trading
TheEnd IsNigh
TheEnd IsNigh Nov 22, 2021 2:09PM ET
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Reminds me of a great line from Saving Private Ryan on the D-Day invasion scene at the opening. US troops finally break through the defense and a guy with a flamethrower clears out a German machinegun nest. As the burning guys jump out, on fire, one of the US troops says "Don't shoot. Let 'em burn.". Same applies here.
 
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