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Robinhood Stock Faces Headwinds as SEC Weighs in

Stock MarketsOct 11, 2021 04:31PM ET
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© Reuters. Robinhood Stock Faces Headwinds as SEC Weighs in

Stock trading platform Robinhood (NASDAQ:HOOD) has been making headlines.

The company took a hit with some reports out from the SEC (Securities and Exchange Commission) about some of its operating practices.

When the SEC starts taking notice, it's seldom a good sign, and that's why I'm moderately bearish on Robinhood. (See Analysts’ Top Stocks on TipRanks)

Looking at Robinhood stock since it went public in late July is like looking at the blueprint of a marginally thrilling roller-coaster.

There's one big climb as the company better than doubles its value in the space of late July to early August. Then, much like that roller-coaster, there's a plunge, a slight climb, another plunge, and a series of dips and hills.

That's when the SEC took a hand in the game. Late last week, Robinhood filed an amendment to an already-amended statement with the SEC. This amendment basically called for the SEC to hurry things along and allow sales to take place according to the earlier statement, which has been titled “Resale S-1.”

It's a lot of bureaucratic language to wade through. The gist of it is that the SEC is taking increased notice of Robinhood. That may hurt the platform's ability to let users actually use it.

Wall Street's Take

Wall Street consensus analysis calls Robinhood a Moderate Buy. Based on the projections of 13 analysts that have 12-month price targets on the company issued in the last three months, seven consider it a Buy. Five call it a Hold, and one analyst has it classified as a Sell.

The average Robinhood price target occupies a fairly broad range. The current average target is $53, with a high target of $68, and a low target of $35.

Strong Competitor with Serious Problems

Give Robinhood some credit for improvement in the last couple of months.

Its move to bring 24/7 phone support to its operation means high marks from users. It also helps that the company offers IPO Access. IPO Access allows people an opportunity to buy the companies of tomorrow at comparatively lower prices. Its fractional share purchases, and access to cryptocurrency trading also give it an edge in the market.

However, Robinhood seems to be the SEC's whipping boy of choice lately. One of Robinhood's key revenue streams, known as “payment for order flow,” is in jeopardy. Payment for order flow, or PFOF, allows brokerage firms like Robinhood to be paid if they route orders to different places. If the SEC puts its foot down on such practices, that's a blow to Robinhood's cash flow.

What's more, that cryptocurrency trading that Robinhood is engaging in is also coming under SEC scrutiny. If those markets become increasingly regulated, a big slug of Robinhood's revenue — about 41% in the second quarter alone — could be at risk.

That's an awful lot of worries in one place. That makes Robinhood an even bigger risk than its fundamentals should suggest. Throw in the fact that it's a very recent competitor to a very crowded market, and that puts Robinhood even farther on the back foot.

Concluding Views

Robinhood is, objectively, a solid operation. It has plenty of worthwhile features. Robinhood smoothly combines stock and crypto trading under one roof, which is handy.

Robinhood has a lot of room to improve, and a lot going for it. However, until the SEC pulls the spotlight it's placed on Robinhood somewhere else, it's hard to be very bullish on Robinhood at all.

Disclosure: At the time of publication, Steve Anderson did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

Robinhood Stock Faces Headwinds as SEC Weighs in
 

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