Selling Seems Overdone for Robinhood Stock

Robinhood (HOOD) stock listed at a time when meme stock investing euphoria was still near the peak. At listing, the valuations were rich and HOOD stock touched highs of $85.

However, it didn’t take much time for the markets to get back to reality. The stock has been on a sustained downtrend and currently trades below $20.

The brokerage company still faces headwinds. However, I believe that the selling is overdone. A relief rally is likely and I am bullish on HOOD stock at current levels.

Morgan Stanley recently updated its tracking of retail participation in the stock market. Retail investing is at a highest level since short squeeze rallies. Therefore, from an industry perspective, things still look optimistic.

There are concerns that Fed tapering coupled with potential rate hikes in 2022 can dampen market sentiment. However, I believe that retail participation will remain high.

A key reason is that real interest rates are likely to remain negative through 2022. Investors need exposure in asset classes like equities to maintain the purchasing power of money.

Let’s also discuss some company specific catalysts.

Growth Avenues for Robinhood

For Q3 2021, Robinhood reported revenue growth of 35% to $365 million. For the same period, the cryptocurrency segment revenue increased by 860% to $51 million. There are two important reasons to believe that the cryptocurrency segment will continue to deliver robust growth.

First and foremost, Robinhood is expanding cryptocurrency-related services. The beta version of the crypto wallet has been released and already has more than one million sign-ups. Robinhood also has a limited set of crypto pairs available for trading. The company plans more pairs, and that will boost trading volumes. It’s also worth noting that centralized cryptocurrency exchanges have charges of up to 4% for buying and selling. Robinhood, in contrast, offers trading with 0% charges.

Furthermore, the adoption of cryptocurrency is still at an early stage. Only 14% of Americans own cryptocurrencies. However, it’s expected that 50 million Americans are likely to buy cryptocurrencies in 2022, according to research by The Ascent. This will benefit Robinhood.

At the same time, Robinhood is expanding services in the equities segment. Robinhood has already partnered with 12 companies to make their IPOs available to customers. As the umbrella of services expand, active user growth is likely to accelerate.

Another important point to note is that as of Q3 2021, Robinhood reported cash and equivalents of $6.2 billion. This gives the company ample financial flexibility to pursue aggressive growth.

In July 2021, Robinhood’s CEO also suggested that the company is eyeing expansion beyond trading. The company aims to be the only app that people use on their phones for money purposes, such as bill paying, expenses, and bank deposits. This is likely to be a completely new business segment with a big addressable market.

Similarly, Robinhood currently has presence only in the United States. It’s a purely speculative view, but international expansion is likely in the coming years. This will ensure that the growth momentum sustains.

Wall Street’s Take

Turning to Wall Street, Robinhood has a Moderate Buy consensus rating, based on six Buys, six Holds, and two Sell ratings assigned in the past three months. The average Robinhood price target of $39.43 implies 148.1% upside potential.

Concluding Views

Competition in the industry is among the key risk factors.

The discounted brokerage industry does not have high barriers to entry. For example, in August 2021, it was reported that PayPal (PYPL) is exploring ways to let users trade stocks. Having said that, HOOD stock is oversold. Even with headwinds of slower growth and decline in average revenue per user, the stock looks poised for a rally.

In terms of the roadmap, Robinhood plans to introduce ACATS-In and retirement accounts in the coming quarters. This should help in boosting monthly active users. For Q3 2021, Robinhood also spent significantly on technology and platform development. These expenses are likely to yield results in the form of a better platform for users.

Overall, HOOD stock is a contrarian buy at current levels. It would not be surprising to see the stock rally in 2022.

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