Key Considerations Before Investing in Robinhood (NASDAQ: HOOD)
Robinhood (NASDAQ: HOOD) has witnessed a remarkable 87% surge in its stock price over the past year, fueled by its involvement in the meme-stock frenzy that catapulted its shares to $85 shortly after its 2021 IPO.
Despite this recent rally, the stock remains 80% below its peak. While the company has shown signs of bottom-line improvement in recent quarters, significant questions linger. Here are essential factors to ponder before considering an investment in Robinhood.
Robinhood has innovated finance in several ways
Established more than a decade ago, Robinhood embarked on a mission to “democratize finance for all,” aiming to enhance accessibility and affordability for retail investors. Introducing zero-commission trading, the company disrupted conventional brokerage profit structures and pioneered the adoption of fractional shares, prompting transformative shifts in the brokerage landscape.
Yet, alongside its innovative strides, Robinhood has encountered substantial scrutiny. Criticism has emerged regarding its gamification of investing, which some contend fosters impulsive behavior and excessive trading, notably contributing to the meme stock frenzy of recent years.
Additionally, Robinhood’s business model, which involves selling customers’ order flows to a market maker in exchange for a nominal fee, has drawn scrutiny. While this facilitates commission-free trading, concerns have been raised about potential conflicts of interest and whether customers receive optimal pricing execution.
Growth in recent years has been lackluster
In the previous year, Robinhood recorded $1.9 billion in revenue, marking a 37% increase from the preceding year despite facing considerable challenges. This revenue figure represented a modest 3% uptick compared to 2021 when the company capitalized on heightened stock market activity.
However, profitability remains elusive for Robinhood. Despite making strides, the company still reported a loss of $541 million last year. Nevertheless, this figure represents an improvement compared to the $1 billion loss in the preceding year and the staggering $3.7 billion loss recorded over the two years prior.
The company has experienced sluggish growth in its customer base, with the number of funded customers reaching 23.4 million last year, reflecting a modest increase of 1.7% from the prior year. Additionally, the count of monthly active users stood at 10.9 million, marking a decline of 4.4% from the preceding year and a notable 37% decrease from 2021.
Here’s how the broker plans to win customers
Robinhood is actively pursuing strategies to expand its customer base and attract more funds to its platform. Notably, it offers Robinhood Gold customers the opportunity to earn a 5% interest rate on invested brokerage cash. Additionally, the company provides traditional individual retirement accounts (IRAs) and Roth IRAs, incentivizing long-term account holding by matching customer contributions. Moreover, Robinhood facilitates 24-hour trading on hundreds of stocks, five days a week.
In its efforts to diversify and bolster its business, Robinhood has observed positive growth in assets under custody, surging by 65% from the previous year to reach $102.6 billion. However, this figure signifies a modest 5% increase above its previous high-water mark set in 2021.
Assessing Robinhood’s Investment Potential
Robinhood confronts formidable competition and struggles to secure a significant market share among key customer demographics. According to a survey by The Motley Fool, it ranks behind competitors like Block’s Cash App, Fidelity, Coinbase, Acorns, and JPMorgan in popularity among respondents, illustrating a weak competitive position and a challenging path to gaining market traction.
Moreover, despite turning a profit in two of the past three quarters, Robinhood faces notable hurdles in key growth metrics such as the number of funded customers and assets under custody. Its growth trajectory has notably decelerated, reflecting intensified competition within the brokerage industry.
While the company remains in the nascent stages of its growth narrative, the outcome remains uncertain, rendering it a highly speculative investment at present. For most investors, it may be prudent to exercise caution and refrain from purchasing the stock until clearer signs of sustained growth and competitive advantage emerge.
