HOOD Stock: Is Robinhood a Buy Now?
March 24 2022 - 5:33AM
Finscreener.org
Robinhood Markets (NASDAQ:
HOOD) is a United
States-based
financial services
company that aids in
commission-free trading of stocks, exchange-traded funds, and
cryptocurrencies over a mobile application platform. The stock has
declined by close to 70% from its IPO price and is currently down
by more than 30% year-to-date. HOOD stock is currently trading at
$13 compared to its all-time high price of $85.
Robinhood has been crippled by
regulatory concerns surrounding its payment for order flow revenue
model. The post-COVID decline in cryptocurrency growth has further
contributed to its massive decline. Now that the once high-flying
fintech stock is trading at a depressing valuation compared to its
peers, is it worth buying?
Robinhood crippled by controversies
Robinhood gained popularity
amongst first-time investors because of its user-friendly, no
commission, and game-like investing app. It not only provided stock
alerts but also gave away free shares through various
promotions.
This revolutionary application
became extremely popular during the initial pandemic days with over
nine million users getting on board. In January 2021, it gained
further momentum when a group of retail stock traders on Reddit
drove up the price of meme stocks like
GameStop (NYSE:
GME), AMC
Entertainment Holdings (NYSE:
AMC), and Bed Bath &
Beyond (NASDAQ:
BBBY).
However, Robinhood started
restricting the trading of certain meme stocks. Users
rebelled and alleged the company was conspiring to protect hedge
funds. Though this allegation turned out to be false, Robinhood was
under an obscure financial regulation for which it was required to
put up billions of extra dollars to protect the extra risky
trades.
Its users found out that
Robinhood was actually
earning money
by selling details of orders of each
of its customers to the market makers. They felt cheated and
resentment towards the company increased. It was also
condemned by both Republicans and
the Democrats for halting trading as it was not beneficial for
retail traders. All these controversies have contributed largely to
the company’s loss of reputation.
Regulatory concerns surrounding HOOD stock
In June, Robinhood had to
pay a fine of $57 million to the
Financial Industry Regulation Authority as well as $12.6 million
for the restitution of its users. This is because the regulatory
body alleged the company had undergone a lot of regulatory
lapses.
These include distributing false
or misleading information, poor regulation of its own technology,
improper due diligence or simply offering incomplete market data to
its users. As per the 122-page report, more than 90,000 accounts
were opened in Robinhood despite showing red flags for fraud. FINRA
also found prior to 2020 there were frequent outages that kept
clients from their accounts.
SEC Chair Gary Gensler
said a ban was on the table for the
company’s payment for order flow model which is already banned in regions like Britain, Canada,
and Australia. Robinhood’s latest financials reveals that the
company derives 80% of its revenue through this model so this ban
can be a huge setback for the company’s operations.
Generating Losses
Robinhood’s profits have
deteriorated largely in the past year. Its recent quarterly report
revealed though the company’s total net revenues for the last three
months of 2021 had increased by 14% to $363 million, it had
generated a loss of $423 million translating to a diluted loss per
share of $0.49.
For the full year 2021, however,
its revenue showed a massive 89% improvement to $1.82 billion.
However, it posted a loss of $3.68 billion compared to the income
of $14 million a year ago. Compared to the previous quarter, Net
Cumulative Funded Accounts have increased only by 1% while Monthly
Active Users have decreased by 8%.
Robinhood has a sizeable customer
base and has proven its agility amongst young retail investors. The
company can cross-sell other financial products and services like
crypto wallets, or fully paid securities lending to its 23 million
funded accounts.
Analysts have a target price of
$17.92 on the stock. It represents a 40% upside potential.
Investors who are willing to take high risks might consider its
shares as they are pretty cheap now.
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