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Stock Update: Robinhood (HOOD)
Concerns around Robinhood's business model keep growing.
Good morning, investors!
Today, we’re going to check in with a budding fintech company with somewhat of a shady past (and present): Robinhood
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Without further ado…
On July 29, we released our Robinhood Due Diligence report — the day of HOOD’s initial public offering. If you recall, we discussed Robinhood’s litany of legal issues and tenuous revenue situation. We also cautioned about short-term volatility since Robinhood chose to offer early IPO access to its users (a shrewd marketing tactic):
Robinhood’s price could be extremely volatile in the opening days/weeks/months of trading — more so than the usual IPO.
Well, guess what happened?
HOOD issued its shares at $38, which slipped to $34.82 by the end of its first day of trading. Less than a week later, HOOD spiked to as high as $85.
Now, it’s back down to $42.08.
What drove the spike and subsequent fall?
Robinhood, the OG platform for meme stock investors, became somewhat of a meme stock itself. The primary catalyst was Cathie Wood, the CEO and CIO of Ark Invest who’s garnered the attention of the masses over the last few years.
Her firm opened a sizable position in HOOD on July 30 — buying more than 1.8 million shares across several of Ark’s funds. As news of her purchases spread, investors followed suit. (Cathie double-dipped last week, buying even more shares of HOOD when Evergrande concerns incited fear throughout the market and drove prices down.)
However, the “meme” status was short-lived. Robinhood released its first earnings report as a public company on August 18. HOOD retreated back near its IPO price levels.
At first glance, Q2 seemed like a banner quarter. Robinhood’s Q2 revenue was up 131% from 2Q20 and 8% from 1Q21. Operating income was almost $65 million. If you back out a $528 million non-cash expense, net income was up about $3.6 million year over year.
Then why did shares of HOOD drop by 10.2% once trading opened the next day?
The primary reason was the company’s crypto-trading activity, particularly its reliance on Dogecoin, the joke currency that caught fire earlier in 2021. During HOOD’s Q2 earnings call, management mentioned that Dogecoin accounted for 62% of crypto-trading volume, which was up from 34% in Q1.
That doesn’t exactly indicate strong, sustainable revenue growth. (One J.P. Morgan analyst thinks the slump will continue, with a price target of $35 a share.)
The news doesn’t get better since the company’s earnings release. To make matters worse for Robinhood, it may have to contend with another fintech giant: PayPal.
On August 30, CNBC broke the news that PayPal had hired Rich Hagen, the former president of Ally Invest and co-founder of TradeKing. That comes after PayPal teased adding “investment capabilities” to its platform during its investor day in February.
That same day, Barron’s released an article in which it shared tidbits of an interview with SEC Chairman Gary Gensler, who was quoted saying that banning payment for order flow is “on the table.” Payment for order flow (PFOF) is the primary way Robinhood makes money, accounting for 80% of total revenue in Q1 and Q2 of this year. (If you need a refresher on PFOF, we outlined this revenue concept in our report.)
During Robinhood’s earnings call, it took pre-submitted questions from shareholders. Naturally, several questions were around this topic — but I’ll share an interesting snippet from one of CFO Jason Warnick’s answers:
We do think because payment for order flow is such a small revenue stream, it's about 2 – 2.5 cents per $100 traded, that it's not a terribly difficult revenue stream for us to replace.
We’ll continue monitoring the situation to see how easy it is for Robinhood to replace $451 million of revenue.
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