Robinhood Markets Inc. (Ticker: HOOD) - Brief Breakdown
In our Brief Breakdowns, we pick a stock and take opposite sides – one of us presents the bullish argument and the other presents the bearish argument.
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Robinhood Markets Inc. is a financial services company that offers a web-based and phone application that allows users to invest in stocks, exchange-traded funds (ETFs), options, gold, and cryptocurrencies. The company offers various learning and education solutions comprised of Robinhood Snacks, Learn tab, financial dictionary, Newsfeeds, and lists to allow users to monitor and learn about various investments and companies. Robinhood has a reported 31 million users as of 2021.
At the time of this writing (11/14/2021), HOOD is trading at $35.21 with a 52 week range of $85.00 - $33.25 and a market cap of $29.42B. In Q3 of 2021, total net revenue increased 35% year-over-year (YoY) to $365 million. Transaction based revenue increased 32% to $267 with options revenue increasing 29%, revenue generated from cryptocurrencies increasing a massive 860%, and equities revenue decreasing by 27%. Robinhood’s net loss was $1.32 billion or $2.06 per diluted share which is an increase of $1.26 billion compared to the prior year. Return of equity (ROE: Net Income / Total Equity *100) of HOOD is -339.32% and net margin (net income / revenue) is -190.12%. The debt to equities ratio (total liabilities / total equity) is 1.62. This financial analysis was done using financialstockdata.com (become a beta tester here). You can view HOOD’s 2021 Q3 earnings here and due to HOOD’s recent IPO there is no current annual report. Below we have percent returns since January 1, 2020 denominated in US dollars and in Bitcoin. We have decided to include the stock price in Bitcoin to show how the stock is performing relative to the best current inflation hedge to further analyze equity performance during extraordinary inflationary times.
As more and more news surrounds investing, more people are gravitating to Robinhood’s mobile investing platform. Because of the press around investing and the availability of the Robinhood platform, Robinhood’s user base nearly doubled in 2021. As more and more users came on the platform, Robinhood’s business model became more in the public eye. Robinhood has been in the midst of controversy ever since users were unable to purchase GameStop (Ticker: GME) shares during the height of the WallStreetBets madness. Robinhood also started a movement marketing commission-free transactions making investing more accessible to users, but was later in a lawsuit due to misleading clients and selling assets to users for a more expensive price point. Although Robinhood has been in the forefront of controversy recently, it allows users and primarily the younger generations more access to investing.
Here are three points to support the bullish thesis:
Bringing Wall Street to Main Street: If your goal is to make Wall Street mirror Main Street, what better way than to bring trading capabilities to main street traders? That’s what Robinhood has accomplished, and they’ve done it with a sleek, easy-to-use app. Having used several other trading apps, I can confidently say I prefer the UI/UX of Robinhood. From account set-up to buying/selling securities to tax documentation, the app is intuitive and incredibly easy to use. Whether you’re an established institution or new on the block, if you’re developing a trading app, you’re likely looking to Robinhood as the gold standard.
Incredible growth: Robinhood’s user base grew somewhat steadily over its first few years of operation and exploded in 2020 and throughout the first 9 months of 2021. Indeed, in Q3 of 2021, monthly active users rose by nearly 80% year-over-year and assets under custody rose from $44B to $95B over the same time period. Although they underperformed expectations in Q3, Robinhood continues to grow, albeit at slower rates than Q1 and Q2. The explosive growth earlier in the year was likely due to “meme stock” trading. If Robinhood can continue to expand to new users and, perhaps more importantly, retain their current users, the company should become more valuable.
Room to grow: While Robinhood has exploded in popularity for retail traders using standard brokerage accounts, they have the ability to expand their offerings. For example, Robinhood could incorporate retirement accounts on their platform. In addition to including other account types, Robinhood has the ability to greatly expand their crypto features. They are currently developing a crypto wallet feature that would allow users to transfer tokens rather selling and re-buying through a different exchange.
Here are three points to support the bearish thesis:
Recent Controversy: Controversy has surrounded Robinhood since 2018 when Bloomberg News reported that almost half of Robinhood’s revenue was generated from payment for order flow. This simply means that Robinhood was selling orders for higher than their rivals, in some cases up to 60 times more expensive. In 2019 Robinhood was fined $1.25 million by the Financial Industry Regulatory Authority for this reason and in 2020 Robinhood was sued in a class-action lawsuit for failing to disclose that a large portion of its revenue relied on payment for order flow. Robinhood has also been in the news for allowing users to borrow unlimited funds via selling covered calls, suffered from systemwide outages, shut down because of WallStreetBets short squeeze of GamesStop, and had to pay $65 million because of an SEC probe. Robinhood also was in the news for a suicide by Alexander E. Kearns due to a negative balance of $730,000 which later came out as a temporary negative balance. All in all, Robinhood has been in the news and it rarely has been positive.
Gamification of Investing: In December of 2020, the Massachusetts Securities Division filed an administrative complaint alleging violation of state securities laws by essentially marketing itself to investors “without regard for the best interests of its customers and failing to maintain the infrastructures and procedures necessary to meet the demands of its rapidly growing customer base.” This could be a start of multiple states and bigger regulatory actions against Robinhood who has already been in the heart of controversy.
Increase in Cryptocurrency Revenue: It is rare that an increase in revenue can be looked as a negative, but when there is such a drastic increase like Robinhood has seen in cryptocurrency revenue (up 850% over the previous year) cannot be sustainable. As more crypto exchanges become well known and fees associated with crypto orders become lower and lower, Robinhood has a model that will be difficult to maintain. Losing revenue in equities seems to be negative as well as options and crypto revenues increase, few investors are using the platform as buy and hold investors and more are using the platform for leverage.
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Have a great week everyone,
Brandon & Daniel
Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. They have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.