📉 Has Robinhood Lost The Way?
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📉 Robinhood: Lost Glory?
Robinhood Markets Inc. (HOOD) was a rags to riches story for its founders when it went public last July. The bright part ends there. Today, the company finds itself amidst mounting losses, increasing costs, regulatory pressure, and possibly a question mark on its business model. (Tweet This)
There’s No Way To Spin This
Difficulty in managing rapid growth
Reliance on transaction-based revenue, including Payment for Order Flow (PFOF) (see below)ee
Difficulty in raising additional capital on reasonable terms
Possibility of mishandling cash, securities, and cryptocurrencies of customers
Potential for adverse developments in pending litigations and regulatory investigations
What are these not-so-random sentences? These are the forward-looking statements that the management of Robinhood had put forth in its commentary on the possible risks to its business. It turns out these are just five of 23 other items the company had highlighted as part of the future outlook.
The online brokerage firm, which had become the darling of Gen-Z and Millennials during the meme stock frenzy last year, now finds itself in a soup that it is unsure it will emerge out of.
Payment for Order Flow or PFOF is the compensation that a broking firm receives for directing orders to different parties for executing trades. The payment is usually a fraction of a penny per share for directing the order to a particular market maker.
What is sacrosanct for any regulator - in this case, the Securities and Exchange Commission (SEC) - is that the end customers receive the best price for the orders they’re placing. However, the SEC has not taken too kindly about Robinhood’s revenue solely attributable to PFOF.
The number is unusually high in the case of Robinhood and the SEC ended up slapping a fine of $1.25M in 2019, followed by a heftier $65M fine last month. The SEC is miffed about the misleading information from Robinhood regarding its revenue sources and for offering inferior trade prices to customers.
One would think that’s a red line Robinhood wouldn’t cross and will figure out new revenue sources. Well, it turns out in Q4 2021, Robinhood derived 72% of its overall revenue through PFOF and other transaction rebates.
The worry amongst investors - and rightly so - is that the SEC will not take kindly to this and might crackdown further, negatively impacting the share price that’s already been beaten down. The company has acknowledged this possibility (see the bullet at the beginning of this article).
During the “meme stock” frenzy, Robinhood positioned itself as the “broker of the future” and promoted itself to these retail investors showcasing its commission-free trading concept. These same investors got into action during the company’s IPO. The result: shares that listed at $38 shot up to $85 in a few days. The shares closed on Friday at $12.73. Talk about fall from grace.
From Tailwinds To Headwinds
Robinhood's Q4 results showed the company missed estimates on all fronts. Q1 outlook was also dour.
Key Highlights From Q4:
Revenue: $362.7M Vs $370.9M expected
Loss per Share: $0.49 Vs $0.42 expected
Crypto Revenue: $48M Vs $55M expected
Monthly Active Users: 17.3M Vs 19.9M expected
The company reported a net loss of $423M during the quarter compared to a net profit of $7M in the year-before quarter (before going public).
Why the dramatic turn? Q4 operating expenses rose 162% to $783.1M compared to the year-ago period. The company went on a hiring spree last year, but now plans to go slow. The company expects operating costs to increase ~17% in 2022.
Compared to Q3, Net Cumulative Funded Accounts are up only 1% to 22.7M; Monthly Active Users declined 8% to 17.3M; Assets Under Custody grew a tepid 3% to $98B. Average Revenue Per User fell 1.5% to $64. (ARPU is down 39% Y-o-Y).
The company lamented the lower trading volumes per user in options and equities, and lower interest income due to a decline in market rates on loaned securities. If you thought the news couldn't get worse, Robinhood poured cold water by stating its Q1 2022 revenue would decline 35% Y-o-Y to less than $340M. The excuse: last year this time, meme stock mania had reigned supreme.
Its cryptocurrency wallet began beta testing last week with 1K customers, and the waitlist for the wallet is almost 2M users. To shore up its management strength, Robinhood brought in TD Ameritrade executive Steven Quirk as "Chief Brokerage Officer." Harvard Business School professor Frances Frei joined the board in November.
Where the company shines bright compared to competition is in the usage of its mobile app. If the business doesn't show rapid recovery in the coming quarter or two, it's possible Robinhood might end up becoming a takeover target.
It seems Robinhood's founders, who now find themselves out of the Billionaires index, wouldn't mind a real-life Robinhood to breathe some life into the company's languishing share price, which is down 75% from the IPO price of $38.
Market Reaction
HOOD ended at $12.73, up 9.65%.
Company Snapshot 📈
HOOD $12.73 +1.12 (9.65%)
Analyst Ratings (13 Analysts) BUY 38% HOLD 54% SELL 8%
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