Robinhood: Time to Pivot

Robinhood (NASDAQ:HOOD) got lucky in 2021 with the meme stock retail explosion in Q1, followed by mammoth volumes in cryptocurrency in Q2. 

I do not expect Robinhood to be profitable in the short term. I am neutral on the stock. Robinhood was given the opportunity of a lifetime in 2021, and was unable to retain a long-standing user base, but is pivoting into the more lucrative crypto market. 

Where’s the Growth?

Comparing the expectations between the IPO in Q3 and now is night and day. Due to the extreme market conditions in H1 investors were wrong-footed during initial IPO trading, which has led to the dwindling price. 

Trading at less than half of the opening trades post-IPO, and a fifth of the all-time high price set shortly after, it is safe to say the IPO optimism hasn’t lasted.

Q3 results are what should be considered the norm, $365 million in revenue – a 35% year-over-year increase – which is not the top line growth that should be expected in the current price range. Comparing Q2 and Q3, revenue dropped significantly from $565 million to $365 million. Ultimately leading to a price/sales ratio of 9.7x. 

Monthly active users dropped 11% quarter-over-quarter from 21.3 million users to 18.9 million. Users are up 77% year-over-year, but it seems growth has plateaued, at least for now. The detrimental issue is revenue per user dropping 36% year-over-year to only $65, the lowest of any reported quarter. 

As well due to being mobile only at this time, user growth is skewed towards young investors, who on average have significantly less savings.

Looking forward to Q4, management expects an even further drop of revenue to less than $325 million. Expect stagnation in the near future, unless a large market wide crypto volume influx occurs.

The bottom line is obviously struggling as well with a GAAP loss of $1.32 billion, although a $1.25-billion expense was share compensation. The net income would still be a loss of $72 million after adjustment.

Loss of Opportunity 

The sluggish growth is largely in part to the above-average recent years.  

Due to the pandemic, the personal savings rate exploded up to 33.8%, which has since slowed to the pre-pandemic average of ~7%. Even before the meme-stock rally, Robinhood had above-average revenue potential due to market conditions. 

The overall boredom of many during the height of pandemic lockdowns led to many seeking out investing as something to do.

During the fallout of the meme stock debacle, many retail investors blamed Robinhood for limiting trading, which ultimately stopped their profits. Regardless if Robinhood is to blame, a significant blow has been permanently dealt to the Robinhood brand. Many investors see Robinhood’s actions as a break of their mission statement: 

“Robinhood’s mission is to democratize finance for all. We believe that everyone should have access to the financial markets, so we’ve built Robinhood from the ground up to make investing friendly, approachable, and understandable for newcomers and experts alike.”

Although many investors pass over mission statements, in this case it is important. The loss of perceived identity is a permanent black mark on the company. 

Both personal savings rates and increased time on hands due to the pandemic are unlikely to be repeated, at least to the same degrees seen in 2020 and early 2021. Public perception can be changed though, it just requires time.

Time to Pivot

Robinhood is now pivoting to become crypto oriented. It recently announced a beta for a crypto wallet, currently with a waitlist over 1.6 million. This is no surprise as in Q2 crypto-based revenue accounted for 41% of the total revenue. More specifically the meme-coin Dogecoin made up 62% of crypto-trading volume.

The pivot is overall a smart plan, pairing the younger user base of Robinhood with the growing crypto market. The spreads for smaller crypto currencies like many meme-coins tend to be large in comparison to the larger players; Bitcoin and Ethereum. 

It’s not all smooth sailing though, many competitors exist within crypto, such as Coinbase (NASDAQ: COIN).

Wall Street’s Take

Turning to Wall Street, HOOD stock earns a Moderate Buy rating based on six Holds, six Buys, and two Sells assigned during the past three months.

The average HOOD stock price target of $39.43 implies 149.2% upside potential.

Concluding

At the current price point, Robinhood is becoming appealing, but questions about long-term growth require a significant risk premium. 

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Disclosure: At the time of publication, Brett Rodway had a position in Bitcoin, and Ethereum.