Two days before earnings — due out today, after close of trading — digital broker Robinhood Markets (HOOD) announced plans to lay off 9% of its full time workers. Investors naturally wondered whether this was a preemptive response to the numbers Robinhood was preparing to announce this evening — and sold off the stock by nearly 5%.
That’s a reasonable concern. Robinhood didn’t seem to think this was a discretionary cut, after all. In his blog post announcing the layoffs, CEO Vlad Tenev called the move “difficult” but “necessary” as Robinhood exits a period of pandemic-fueled “hypergrowth.”
From early 2020 through mid-2021, explained the CEO, Robinhood grew its customer base more than four-fold — and its employee count “almost 6X.” Now, Robinhood’s payrolls are bloated with “duplicate roles and job functions,” and extra layers of management that inhibit efficiency. Now… does that sound like the kind of problem that might have had a negative effect upon Robinhood’s sales and earnings in Q1 2022 — the numbers Robinhood will be reporting today?
It kind of feels like it, doesn’t it? And one suspects that Tenev, in announcing the cuts, may have been aiming to head off criticism, in the event that Robinhood has to report worse results than the $0.38 per share loss, on a 32% reduction in revenues (to $522 million) today — which could definitely happen.
Commenting on the move, Morgan Stanley analyst Michael Cyprys agreed that the CEO’s blog post appears to reflect “recognition of a weak revenue backdrop that’s unlikely to improve in 2022,” and recognition, too, that Robinhood’s lack of profits “is a key investor concern.”
To that extent, Tuesday’s announcement was probably a wise move for Robinhood management to make (because, if you can’t make the numbers look good, you can at least empathize with your shareholders over how truly bad those numbers are). That being said, the fact (probably) remains that the numbers will not look good today, and in fact may not look good before 2023 at the earliest — that being the year in which Cyprys predicts that Robinhood will “inflect to profitability on an adjusted EBITDA basis.”
In the meantime — i.e. for the next eight months or more — Robinhood must continue to contend with “a user base that may be disproportionately affected by rising inflation,” that is trading less, that is frustrated by the collapse in cryptocurrency values, and that consequently is handing over less revenue to Robinhood than it did earlier in the pandemic.
Suffice it to say that this does not bode well for Robinhood stock, which Cyprys rates only “equal-weight” despite his belief that the shares are worth $15 apiece (i.e. more than 50% more than they sell for today).
What would it take to change the analyst’s opinion and win Robinhood a “buy” rating? “Re-acceleration of user growth” would help, says Cyprys, as would a general “improvement in market sentiment that sparks renewed user engagement,” (i.e. more stock trading).
And, it wouldn’t hurt if Robinhood would stop losing quite so much money.
To see Robinhood stock forecast, click here.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.