Stock Analysis & Ideas

Robinhood Stock: Shrinking Active User Base Raises Concerns

Based in Menlo Park, California, Robinhood (HOOD) operates a platform for trading assets such as stocks, options, and cryptocurrencies. I am neutral on the stock.

In 2020, the Robinhood platform was on fire as COVID-19 lockdowns forced people indoors, and people (unfortunately) treated stock trading like a video game. Then in 2021, meme-stock traders went on a buying spree, and Robinhood was, again, highly active with retail investors.

Things are different in 2022, though. COVID-19 lockdowns aren’t happening currently in the U.S. (though this could change as China grapples with its own outbreaks). Also, the meme-stock trade isn’t in full effect like it was a year ago.

Without a doubt, HOOD stockholders and commentators had these issues in mind when Robinhood prepared to release its financial results for the first quarter of 2022. This report could prove to be make-or-break for the zero-commission trading platform company. Unfortunately, while there are positive points to take away, the overall balance seems to weigh in the bears’ favor.

First, the Good News

Robinhood reported its first-quarter results on April 28, and the next day, HOOD stock declined moderately but still stayed fairly close to the $10 level. This is significant because $10 has psychological importance, so the buyers will definitely want to defend this level.

In any event, HOOD stock wasn’t completely crushed, as in a 10% or 20% drop. The sentiment felt slightly negative overall, but it wasn’t drastic.

So, at least that’s some good news. Also positive is the fact that, during 2022’s second quarter, Robinhood’s net earnings loss of $392 million (45 cents per diluted share) marked an improvement over the net loss of $1.4 billion ($6.26 per diluted share) from the first quarter of 2021.

Of course, it would have been nice to see a swing to profitability, but evidently, that’s too much to ask for in early 2022. That being said, if Robinhood posts a net profit instead of a loss in the next quarterly report, HOOD stock could get a nice boost.

In other positive news, Robinhood appears to be managing larger amounts of its users’ capital. As it turns out, the company’s net cumulative funded accounts increased 27% to 22.8 million, while Robinhood’s assets under custody grew 15% to $93.1 billion.

Additionally, we should observe that Robinhood’s balance sheet remained steady. The company’s cash and cash equivalents totaled $6.2 billion as of March 31, 2022, versus $6.3 billion a year earlier.

Also worth observing is Robinhood’s rollout of interesting and potentially revenue-generating products/services during Q1 2022. In particular, Robinhood Markets co-founder and CEO Vlad Tenev cited “the introduction of the Robinhood Cash Card, the release of crypto wallets to all customers, the addition of new coins to our platform.”

As the Meme Trade Fades…

The foregoing positive points might sound encouraging, but there’s more to the story, and it’s not good for Robinhood’s stakeholders.

First, a major bombshell: Robinhood’s Q1-2022 cryptocurrency revenue reportedly declined 39% year-over-year to $54 million. Furthermore, this result fell short of the $56.1 million average analyst estimate for Robinhood’s quarterly crypto revenue.

This is a huge disappointment as the addition of cryptocurrency trading was supposed to be a game-changer for Robinhood. However, if Bitcoin and other crypto tokens embark on a bull market, this could bring more cryptocurrency traders into the fold, and that would certainly benefit Robinhood.

Tenev had little choice but to acknowledge the problem. “With the uncertainty in the market, our customers became more cautious with their portfolios, trading less frequently and in smaller amounts across all asset classes, although crypto activity, in particular, came down pretty significantly,” the CEO admitted in an earnings call.

It’s not just the cryptocurrency trade that’s fading, though. Robinhood’s March 2022 monthly active users declined 10% to 15.9 million, against 17.7 million for March 2021, during which Robinhood “experienced high trading volumes and account sign-ups as well as high market volatility, particularly in certain sectors.”

We all know what “certain sectors” Robinhood is referring to, don’t we? March 2021 represented the pinnacle of meme-stock mania. That phenomenon gave Robinhood a bump in its monthly active user count, but the quick boost wasn’t sustainable.

Finally, we should observe that Robinhood’s Q1-2022 total net revenue declined 43% year-over-year to $299 million. Unless the company finds ways to get people excited about the platform again, it’s going to be difficult for Robinhood to recover from this disappointing result.

Wall Street’s Take

Turning to Wall Street, HOOD stock is a Hold based on two Buys, four Holds, and one Sell rating assigned in the past three months. The average Robinhood price target is $15.29, implying 53.2% upside potential.

The Takeaway

There’s a lesson to be learned about Robinhood here: the company’s success depends on people’s feelings about trading and investing in general. When people are feeling risk-on, Robinhood’s business benefits.

Q1 of 2022 showed that, like the prices of meme stocks and cryptocurrency tokens, Robinhood’s active user count is volatile and can drop quickly. For the time being, then, investors should stay on the sidelines and wait to see if Robinhood recovers from the waning of the meme-stock and crypto-trading craze.

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