Revisiting Robinhood (HOOD): Great Opportunity Or Dud?
Revisiting Robinhood (HOOD): Great Opportunity Or Dud?
Robinhood just had its Q4 earnings call. Does the latest earnings report change things for an embattled stock in its all-time lows? Let's revisit whether HOOD is a great opportunity or a dud.
TLDR:
Robinhood had its 2021 Q4 earnings call on Thursday and in aftermarket trading, reached a price that’s 88% off its all-time high.
The stock has experienced a heavy sell-off in the past few months and its market cap is now below its 2020 private market valuation ($11-12 billion vs $11.7 billion).
Although MAU decreased again in Q4, other product/business metrics are stabilising, such as net cumulative funded accounts and average revenue per user.
Revenue is heavily reliant on trading volume, which is hard to control for the company. The company sorely needs to diversify its revenue sources.
Robinhood should, and appears to be, redefining its growth story as one of asset management (Vanguard for young investors) and day-to-day finance (Cash App competitor).
With more than 20 million funded accounts, and significant investment in product foundations in 2021, the company certainly has a good shot at redefining its growth story and achieving this new vision.
The stock might be down, but the company has the right tools, resources, and user base to disprove the market in the long run.
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For the full thread, click here.
Public markets are cruel. If you’re a growth company that isn’t profitable, and show even a small crack in growth, a nervous market will crush your valuation. When the market is pessimistic, there isn’t a big difference between a 10 P/S ratio or 5 P/S ratio, yet the latter is a 50% valuation drawdown from the former. Growth is uncertain and gradual, and in nervous markets, people want money now and P/S ratios don’t matter.
This pain is no doubt what Robinhood is feeling right now. Once a private market darling ($1.3 billion in 2017 to $11.7 billion in 2020), its IPO in mid-2021 was a double-edged sword. One on hand, the company made a lot of money (almost $2 billion). On the other hand, the public market’s fickleness and high standards resulted in a brutal sell-off after an initial post-IPO pop that continued throughout the later months of 2021 and into 2022. The market didn’t hesitate to give the company day-to-day negative feedback on the crappy job the company is doing as a result of forces out of the company’s control. Private markets don’t do that.
Robinhood just reported its Q4 2021 earnings on Thursday and in aftermarket trading, reached a price that’s 88% off its all-time high. Michael Batnick aptly pointed out in a recent blog post that this is equivalent to what the Dow lost during the Great Depression, which happened over the span of 3 years. Robinhood accomplished this drawdown in 6 months.
So what now? With Q4 earnings out of the way, and the stock having dropped more than 25% at its lowest since we wrote about it last, let’s revisit whether the stock has potential or is still a dud.
Lay of the Land
Before we reevaluate Robinhood, let’s see where the company stands after its Q4 earnings update. In Q3, with the meme stock mania behind the company, Robinhood shared drastic drops in key product and business metrics. Although Q4 is not a 180 from the company’s woes in Q3, things appear to be stabilising.
The bad:
Monthly Active Users (MAU) are still decreasing. In Q2, this metric peaked at 21.3 million and in Q3, dropped to 18.9 million. In Q4, it’s at 17.3 million.
Unsurprisingly, Robinhood’s revenue is still heavily based on trading volume of stocks and options (payment for order flow), and crypto (commissions). This is a serious risk to the company’s short term performance as trading volume is largely influenced by macro events that the company does not control.
Heavy investment in the company’s product foundations such as 24/7 customer support, in tandem with significant shared-based compensation post-IPO, created another significant loss of $423 million. This is down from the $1.3 billion loss booked in Q3.
The good:
Robinhood still has the best user interface among US brokers. This resonates with young investors.
Many key product and business metrics are stabilising: net cumulative funded accounts (22.7 million vs 22.4 million in Q3), assets under custody ($98 billion vs $95 billion in Q3), and average revenue per user ($64 vs $65 in Q3).
Massive investment in product foundations in 2021 resulted in several key achievements, including: 24/7 customer support, ACATS integration making it easy for users to deposit/withdraw stocks to/from Robinhood, and the launch of crypto wallets (a common complaint of Robinhood’s crypto product).
Redefining Its Growth Story
If Robinhood is searching for greatness, its retail trading business must be a footnote. This is because at more than 20 million funded accounts, they have likely saturated the young investor market in the US. The massive volume of 2020-2021 from the spike in users from COVID lockdowns and the meme stock mania will outshine any growth in trading volume they can muster moving forward. Finally, as mentioned above, trading volume is very hard to control, especially at Robinhood’s scale. A bear market will crater trading volume, while something like an unexpected global pandemic can skyrocket it. Robinhood has little control over these macro events.
Rather than finding growth through trading, Robinhood should, and appear to be, redefining its growth story as one of asset management and day-to-day finance.
Vanguard is an investment management firm with more than $7 trillion in assets. It’s the largest provider of low cost retirement mutual funds and low cost broad market ETFs in America. Americans love to park their retirement savings in Vanguard funds.
An exciting new growth story for Robinhood is being the Vanguard for young ingestors. Just like it disrupted retail stock brokers, Robinhood can position itself as a Vanguard disruptor, and take a piece of the massive $7 trillion AUM pie. The wonderful thing about managing retirement assets is that it’s a stable business and scales with the age of a user, which is much better than the finicky and uncontrollable trading volume business.
Robinhood appears to be headed down this path. In the Q4 earnings presentation, “Long-Term Investing” is listed by Robinhood as the preeminent growth pillar. They even highlight that tax-advantaged retirement savings accounts (401ks and IRAs) are in the works. Retirement savings accounts are a significant portion of Vanguard’s business.
A second new exciting growth story is day-to-day finance, wherein Robinhood becomes a competitor to Block’s (formerly Square) wildly successful Cash App. With more than 20 million funded accounts, Robinhood can launch money, stocks, and crypto transfer products (crypto transfer already launched) as well as spending products with enticing cashback that synergistically sends money straight to a user’s investment accounts. This product line directly competes with Cash App, and why not? Robinhood has a massive user base of young investors that overlaps greatly with Cash App’s user base. In addition, Robinhood has access to much more of its users’ money than Cash App.
Verdict
With the ugly price action in the past few months pushing Robinhood’s market cap down to $11 billion, the stock is severely oversold and a good short term bet, especially with the company’s strong foundations and significant growth opportunities.
In the long-term, we think Robinhood is a strong but moderately risky investment. In addition to being oversold right now, the company has the right tools, resources, and user base to reach their long term goals. The main risk is whether the company can successfully execute on these goals. “Vanguard for young investors” is a compelling and viable vision. Robinhood could easily flip the script and be seen as an investment in the wealth of young investors, rather than their gambling inclinations.
One needs to keep in mind, though, that Robinhood has a long and arduous journey ahead. Its revenue is and will continue to be, for a long time, driven by trading volume. We expect this to put a strong ceiling on Robinhood’s valuation and cause it to trade sideways in the medium term. As bullish as people are now of Cash App, and Block overall, it traded sideways between $50 and $100 for two years before breaking out in 2020. $HOOD could exhibit the same choppy sideways price movement for many years before breaking out.