What’s Happening With Robinhood Stock?

Robinhood Markets is best known as a zero-commission brokerage app that Millennials turned to, to cash in on the soaring Covid-19 stock market and to ride the meme stock wave. However, Robinhood stock which was listed in late July hasn’t really delivered for investors since its listing this Summer. While Robinhood was listed at a price of about $38 per share, it currently trades just about $42 per share, after briefly rising to as much as $70 per share. So what’s holding Robinhood stock back? We think there are a couple of factors.

Retail traders, who powered Robinhood’s growth, are likely to be less interested in stock trading, as they headed back to the office and seek entertainment outdoors, following the Covid-19 lockdowns. For perspective, Robinhood’s app downloads, which can be viewed as a rough estimate of new account openings, declined 78% over Q3 2021, versus Q2, per data from Apptopia. Other brokerages and crypto trading platforms have seen much smaller declines, in comparison.

There also appears to be some regulatory concerns for Robinhood. The company’s core equity and options business is facing some scrutiny from the SEC over its revenue model which entails selling the order flow of its customers to market makers. The company also recently warned that rising regulatory scrutiny of cryptocurrencies could pose a risk to its business. For perspective, payment for order flow accounted for about 38% of revenue in Q2 2021 while cryptocurrencies accounted for 41% of total revenue.

Robinhood stock has a relatively limited float currently and could be seeing some pressure in anticipation of lockup expiries and plans of large shareholders to liquidate their shares. For example, in early August the company said in an SEC filing that some existing investors who bought into the company via private placement plan to sell close to 97.9 million shares over time.

We value Robinhood stock at about $39 per share, slightly below the current market price. See our analysis on Robinhood Valuation: Is HOOD Stock Expensive Or Cheap? for more details on Robinhood Stock’s valuation and comparison with peers.

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[9/21/2021] Robinhood Is Pushing Further Into Crypto Business. How Will This Impact Its Stock?

Robinhood Markets, best known as a zero-commission stock brokerage, has been increasingly focusing on improving its cryptocurrency offerings. Bloomberg reports that Robinhood is testing new cryptocurrency wallet and transfer features for its app. While customers can already buy and sell crypto assets such as Ethereum and Bitcoin on the Robinhood platform, the wallet feature would enable users to store and manage all their virtual currencies in one place, and also use them without having to convert them to dollars. This has been a much sought-after feature and could enable the company to better compete with the big crypto platforms such as Coinbase. Separately, last week, the company said that it would allow users to set up recurring investments in crypto assets, essentially setting a specific amount to be invested on a periodic basis, automatically.

Robinhood’s interest in crypto is understandable. Over Q2 2021, cryptocurrency accounted for over 51% of the company’s total transaction revenues, eclipsing its core options and equity trading businesses. In fact, over Q2 customers appeared to be signing up on Robinhood primarily for its crypto offerings, with more new customers placing their first trade in cryptocurrencies rather than equities. The increasing crypto exposure should also help de-risk Robinhood’s revenue streams to an extent, as its core equity and options business faces mounting scrutiny from the SEC over its payment for order flow model. The SEC doesn’t really control the crypto market, on the other hand. That said, the crypto market is cyclical and Robinhood’s revenues could be even more vulnerable in a downturn, given its focus on retail traders unlike platforms such as Coinbase who derive an increasing portion of sales from institutions.

We value Robinhood stock at about $39 per share, roughly in line with the current market price. See our analysis on Robinhood Valuation: Is HOOD Stock Expensive Or Cheap? for more details on Robinhood Stock’s valuation and comparison with peers.

[9/7/2021] What’s Happening With Robinhood Stock?

Although Robinhood Markets is best known as a zero-commission stock brokerage that’s popular with millennials and first-time traders, the company actually has a very fast-growing cryptocurrency business. Over the most recent quarter, cryptocurrency accounted for over 51% of the company’s total transaction revenues, eclipsing its core options and equity trading businesses. In fact, in Q2 customers appear to be signing up on Robinhood primarily for its crypto offerings, with more new customers placing their first trade in cryptocurrencies rather than equities. Over 60% of Robinhood’s cumulative funded accounts traded in crypto during Q2 2021. Crypto-related revenue streams surged from a mere $5 million in Q2 2020 to almost $233 million in Q2 2021. Although this is behind the likes of Coinbase, which posted about $2 billion in Q2 sales, Robinhood’s crypto growth is still noteworthy.

Robinhood offers free trades for cryptocurrency, making money by selling the order flow of its customers to market makers, much like it does for options and equity. However, unlike the equity and options payment for order flow businesses which has come under scrutiny, the regulatory risks are probably lower for the crypto business, as the SEC doesn’t really control the crypto market. That being said, we don’t think that Robinhood can count on its crypto business to drive consistent growth. The cryptocurrency market is extremely volatile and is also subject to multi-year cycles (usually two to four years) and engagement could quickly fall off in a bear market. Although this is a risk that all crypto brokers face, the impact on Robinhood could be more pronounced as the company largely caters to first-time investors who could pull out as markets decline. In comparison, rival Coinbase derived roughly two-third of its crypto trading volumes over its most recent quarter from institutional customers, who are less likely to scale back.

We value Robinhood stock at about $39 per share, indicating a downside of about 13% from the current market price. See our analysis on Robinhood Valuation: Is HOOD Stock Expensive Or Cheap? for more details on Robinhood Stock’s valuation and comparison with peers.

[9/3/2021] What’s Happening With Robinhood Stock?

Robinhood stock (NASDAQ: HOOD) declined by almost 5% over the last week (five trading days), compared to the S&P 500 which was up by over 1% in the same period. There are two key factors driving the recent decline.

Firstly, the Securities and Exchange Commission Chairman Gary Gensler has indicated in an interview with Barron’s that the agency was considering banning the payments for order flow model which subsidizes the zero-commission brokerage model that Robinhood uses. The model is controversial, as it entails selling the order flow of Robinhood’s retail customers to market makers and high-frequency trading firms. Although PFOF has more or less become a standard practice in the brokerage industry, a ban would disproportionately impact Robinhood, which derived about half of its transaction revenues over Q1 from stocks and options, compared to other players who are more focused on interest-related revenues and other services.

Secondly, more competition also appears to be on the horizon, with payments major PayPal apparently updating its app to enable stock trading by customers. PayPal could pose a legitimate threat to Robinhood for a couple of reasons. PayPal has over 400 million accounts, most of which are linked with users’ bank accounts, compared to just over 22 million accounts for Robinhood, allowing it to target a large pool of users who likely already have its app installed. Moreover, PayPay is likely looking to use its stock trading features as a means of driving engagement to its app, so that it can sell its payments and other financial services. This could make it less reliant on trading revenues, giving it an edge over Robinhood.

We value Robinhood stock at about $39 per share, indicating a downside of about 13% from the current market price. See our analysis on Robinhood Valuation: Is HOOD Stock Expensive Or Cheap? for more details on Robinhood Stock’s valuation and comparison with peers.

[8/17/2021] Robinhood Stock Continues To Slide. Time To Get In?

Robinhood Markets, the zero-commission online brokerage popular among millennials, has seen its stock price decline by about 16% over the last week (five trading days) to about $47 per share. This compares to the S&P 500 which was up by roughly 1% over the same period. Although there wasn’t much negative news relating to the company in the past week, Robinhood has emerged as a “meme” stock of sorts, with its price movement dictated by interest from retail traders and other technical factors such as its float. The company allocated about 35% of its IPO shares to retail investors and also had relatively lax IPO lockup rules, translating into a higher float and more volatility. Moreover, the stock saw a major rally post its listing, rising by as much as 85% from its IPO price of about $38 at one point earlier this month and this has likely caused investors to book some profits.

So is the stock a buy at current levels? While Robinhood has fared well in recent years as it remains the go-to app for millennials looking to trade stocks, we think the stock is a bit overvalued trading at almost 20x forward revenues. Although the valuation is partly justified by the company’s solid growth, with sales expected to roughly double this year, there are risks as well. With inflation on the rise and the U.S. Federal Reserve looking at rate hikes for 2023, a year ahead of initial expectations, there’s a strong possibility that the stock markets could see limited gains or even a correction, impacting brokerage businesses. Robinhood is more dependent on trading revenues and could be more adversely impacted by a pullback compared to rivals, who rely more on interest revenues. The company’s business model of generating revenue via Payment for Order Flow has also proved somewhat controversial. The SEC indicated that it was reviewing the PFOF model and this could also create an overhang on the stock.

We value Robinhood stock at about $39 per share, indicating a downside of about 17% from the current market price. See our analysis on Robinhood Valuation: Is HOOD Stock Expensive Or Cheap? for more details on HOOD stock’s valuation and comparison with peers.

[8/4/2021] Robinhood stock: What are the risks?

Robinhood Markets, the zero-commission online brokerage, went public last week. Although the stock was off to a rocky start, with prices briefly dipping below the IPO price of about $38 per share, it now trades at about $47 per share, giving the company a market cap of roughly $40 billion. Robinhood has a lot going for it, as it remains the go-to app for millennials looking to trade stocks, with growth surging through the pandemic. For example, funded accounts rose to over 22 million as of June 2021, up almost 4x since the end of 2019. The company also has a fast-growing cryptocurrency business and with its large and engaged user base, it’s possible that it could venture into providing other financial services as well. That being said, we see a couple of key risks for the stock at this point.

The S&P 500 is now up by over 90% from the lows of March 2020. With inflation on the rise and the U.S. Federal Reserve also looking at rate hikes for 2023, a year ahead of initial expectations, there’s a strong possibility that the stock markets could see limited gains or even a correction, impacting brokerage businesses. While this is a risk that all brokers face, the impact on Robinhood could be more pronounced as the company largely caters to first-time investors who could scale back on trading as markets decline. Moreover, Robinhood appears to be more dependent on transaction-related revenues (payment for order flow) versus its peers. About 75% of the company’s revenues were dependent on transactions last year. In comparison, E-Trade, now acquired by Morgan Stanley, derived roughly 65% of its revenues from interest income in 2019.

Robinhood’s bread-and-butter payment for order flow business – which entails selling the order flow of its retail customers to market makers and high-frequency trading firms – is also controversial, with critics arguing that it could effectively give retail investors a worse price on their trades. In June, the SEC indicated that it was reviewing payment for order flow, causing some speculation that the practice, which is already illegal in countries such as the U.K., could be banned in the U.S. as well. While PFOF has more or less become a standard practice for Robinhood’s rivals such as Charles Schwab and E-Trade, they are less dependent on it as a revenue stream, given their larger interest-related revenues and other services.

Separately, there are some technical factors that could impact the stock. The company said that it would sell about 35% of its IPO shares to retail investors. This is in contrast with other companies who have typically allocated well below 10% of the stock for sale to individuals, setting aside a bulk of stock for institutional investors and high-net-worth individuals, who often have a longer-term investment horizon. This could make the stock more susceptible to big movements. For example, the stock rallied by 24% on Monday alone, for no apparent reason. It’s likely we could see similar swings on the downside as well. Robinhood also has looser post IPO lockup rules. Insiders were allowed to sell 15% of their holdings from the time the company went public, with another 15% apparently being freed up within three months. This could translate into a higher supply of stock, putting pressure on the stock price in the near term.

See our analysis on Robinhood Valuation: Is HOOD Stock Expensive Or Cheap? for more details on HOOD stock’s valuation and comparison with peers.

[7/22/2021] How Does Robinhood Markets Make Money?

Robinhood Markets, the zero-commission online brokerage popular with millennials, is expected to go public next week trading under the ticker HOOD on the Nasdaq. The company will offer shares at between $38 to $42 apiece, potentially translating into a valuation of as much as $35 billion. In our dashboard Robinhood Revenues: How Does HOOD Make Money? we provide an overview of Robinhood’s business model and its key revenue streams. Parts of the analysis are summarized below.

Robinhood’s Business Model

Robinhood is an online brokerage that offers commission-free trades of stocks, exchange-traded funds, and cryptocurrency. Although Robinhood doesn’t directly charge its users for trades, it primarily makes money from market makers and frequency trading firms who pay for the order flow from its retail traders. Payments for order flow, or PFOF, accounted for roughly 75% of the company’s revenue last year. Additionally, Robinhood also earns revenue from interest on securities and margins loans. The company also offers other services including the Robinhood Gold premium subscription service, which gives users access to features including professional research and margin trading.

How Have Revenues Trended?

Robinhood has seen its transaction-based revenues grow 320% from around $170 million in 2019 to about $720 million in 2020. In Q1 2021, transaction revenues grew further by about 340% year-over-year to $420 million. The revenue surge comes as more retail investors have been attracted to the stock markets given the big bull run through the Covid-19 pandemic and more recently, the meme stock trading frenzy. For perspective, the number of funded accounts on Robinhood grew from around 5.1 million at the end of 2019 to about 12.5 million in 2020 and stood at an estimated 22.5 million as of the end of June 2021. The retail trading frenzy has also meant that Robinhood is able to better monetize its users. The average revenue per user rose from $65.70 in 2019 to $108.90 in 2020 and to about $137 in Q1 2021, on an annualized basis.

Although options remain the largest driver of Robinhood’s transaction revenue (47% of sales), the cryptocurrency business is the fastest-growing. In Q1 2021, crypto-related revenue soared by around 20x year-over-year to almost $88 million. Apart from the core transactions business, Robinhood’s other segments have also been expanding, with net interest revenue and other revenue together rising by almost 3x in Q1 compared to last year. That said, Robinhood is actually getting more dependent on its transaction revenues, which accounted for almost 81% of sales over Q1, versus about 75% last year.

 

What Are The Risks?

While Robinhood’s recent sales growth has been robust, there are near-term risks. The stock markets could be peaking, with the S&P 500 now up about 90% from the lows of March 2020. Moreover, inflation is on the rise, and the U.S. Federal Reserve is also looking at rate hikes for 2023, a year ahead of initial expectations. A sharp market correction or even sideways movement could limit interest in Robinhood’s platform, which largely caters to first-time investors. Separately, Robinhood’s bread-and-butter payment for order flow business model is also controversial, with critics arguing that it could effectively give retail investors a worse price on their trades. Last month, the SEC indicated that it was reviewing payment for order flow, causing some speculation that the practice, which is already illegal in countries such as the U.K., could be banned in the U.S. as well. While PFOF has more or less become a standard practice for Robinhood’s rivals such as Charles Schwab and E-Trade, they are less dependent on it as a revenue stream, given their larger interest-related revenues and other services.

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