Robinhood (HOOD) stock gains one day after record low
Online investment brokerage company Robinhood's stock price closed up 1.3% Thursday, one day after hitting a record low.
Robinhood (HOOD) closed at $24.20 on the Nasdaq Global Select Market, and continued to inch upward in after-hours trading, after dropping 7.9% to an intraday record low of $23.89 on Wednesday 1 December. The plunge came after HOOD’s IPO share lockup fully expired.
But a leading analyst is sceptical that HOOD’s stock price will gain serious traction in coming months. Kenneth Worthington of J.P. Morgan recently called for HOOD to prove that it could align its services – and compete – with its peers.
In October, Worthington lowered his December 2022 price target for HOOD to $26 from $35.
“With disclosure more limited than at brokerage peers, we see the potential for pricing (PFOF) to be under more pressure, suggesting a weaker business outlook than the revenue numbers suggest,” wrote Worthington in a report that J.P. Morgan provided to Capital.com.
HOOD reported a third-quarter loss of $2.06 per share, which fell below Worthington’s estimated loss of $1.13. And, the company’s $365m (£274.42) in revenue missed the analyst’s target of $488m.
What is your sentiment on HOOD?
Lack of trading volume disclosure ‘peculiar’
“(Management) did not disclose trading volumes, which we think is peculiar for a company generating (about) 75% of revenue on volumes, but we suspect revenue per trade had been elevated, suggesting a weaker business outlook,” wrote Worthington. “Guidance is for further trading downside in (the fourth quarter of 2021), which is surprising given seasonality is typically less pronounced. We believe Robinhood has been overearning and guidance will weaken for ’22.”
Worthington has maintained an underweight rating for HOOD.
The company serves as a digital broker that caters to what it terms “everyday people.” It offers features like fractional-share ownership, which allows investors to purchase up to half a share of a given company.
Company has about 22.5 million accounts
He noted that HOOD has approximately 22.5 million accounts but is handling a small amount of money per account, while rival Charles Schwab – an older and much more established company – is handling much more money on average.
The analyst doubts that HOOD can expand on its already large market share. He noted HOOD’s account total declined in the third quarter – for the first time in three years, based on data that he has seen. HOOD has attributed the decline to limited interest in cryptocurrency-related activity.
Growth not sustainable, analyst says
“While the founders have leveraged innovation, guts and ideal market conditions to build a leading US retail broker, we do not see growth as sustainable and we question the ability of the company to generate competitive margins over time given the focus on such small accounts that have limited room to be profitable,” he wrote.
“While the market seems to be building in some probability of Robinhood being the next mega-app, we see its position as inferior to larger existing participants that have been able to leverage peer-to-peer and payments technology to build and leverage a compelling network. While Robinhood founders have built a company that brings investing to those that have been underserved, we don’t see a technological competitive advantage, and we see a brand and product offering that risks investors graduating to other more comprehensive financial institutions over time. We think market conditions have to remain robust to buy time for Robinhood to build out the infrastructure needed to compete over time.”
Potential to reach younger Americans
But Worthington said HOOD has the potential to obtain a greater than 70% share of its target market of younger Americans. The analyst also gives the company the benefit of the doubt on its quest to expand its brand and business outside of the US.
But he was pointed in his comments about the company's potential during a recent interview with MSN.
“The problem is, they don’t make any money on this (22.5-million) account base yet, and they’ve gotta prove that they can take this large number of clients and actually turn it into a business model that it actually generates earnings over time,” he said. “And, if you look at what they did in the third quarter, they actually didn’t grow. The revenue per client went down. So they need to reverse that.”
Company must grow in bad market
He said HOOD must also prove that it can still grow in a bad market.
“The proof will be in the pudding when that environment actually occurs, and it does seem to be inevitable at some point,” he said.
He noted that the market took years to recover after the tech bubble burst during the dot-com crash in the in the late 1990s.
“If Robinhood can’t make money at this robust market that we’re in, it can probably only go down from there,” said Worthington.
Lots of wood to chop
HOOD aims a one-stop investment shop with services that include a crypto wallet and retirement accounts. But Worthington said the company must bring its basic services up to par before getting into new ventures.
“Eventually, they should get there,” said Worthington of the one-stop-shop goal. “But they’ve got a lot of wood to chop in the meantime – and they’ve gotta priortise.”
He noted that Robinhood only averages $4,000 per account, while rival Charles Schwab is 75 times bigger from an assets perspective.
“Robinhood have gotta catch up to their peers,” he said.