Robinhood Markets stock has declined by almost 31% over the last month, considerably underperforming the S&P 500 which remains up by about 2.4% over the same period. There are a lot of factors weighing Robinhood stock down.
Firstly, it’s looking increasingly obvious that the boom in so-called “meme” stocks and speculative cryptocurrencies such as Dogecoin is cooling off. This was visible in Robinhood’s Q3 earnings as it actually lost customers after posting record growth in the first half of the year.
Moreover, the Federal Reserve is likely to raise interest rates sooner than expected to fight inflation, and this could prove to be a net negative for the stock markets and trading activity.
Separately, the SEC has also been investigating Robinhood’s payment for order flow revenue model, which entails selling the order flow of its customers to market makers, and this has created a big overhang over the stock as transaction revenues accounted for about 78% of Robinhood’s revenue in Q3.
So is Robinhood stock a buy following the recent sell-off? We think it is.
While the concerns regarding the company’s near-term outlook are legitimate, we think this is more than priced into the stock, considering that it has corrected by over 75% from its all-time highs seen in August 2021.
Robinhood has proven to be agile and innovative and has a good understanding of young retail investors and this should help it adapt even as the market cycle eventually turns, or if it faces setbacks to its revenue model.
The company has also built a sizable customer base with more than 22 million funded accounts and this could allow it to cross-sell other financial products and services. Robinhood’s cryptocurrency push is also likely to be a meaningful driver of growth going forward, as cryptocurrency brokering is typically very lucrative (rival Coinbase posted net margins of 33% last quarter).
Robinhood had been adding new features to its crypto service and is likely to launch a crypto wallet feature this month that will enable users to send and receive cryptos.
Robinhood’s stock now trades at about $15.60 per share, trading at a little over 6x our projected 2022 revenues for the company, a cheap valuation, in our view.
We value the stock at about $25 per share. See our analysis on Robinhood Markets Valuation: Is HOOD Stock Expensive Or Cheap? for more details on Robinhood Markets stock’s valuation and comparison with peers.
For more information on Robinhood’s business model and revenue trends, check out our dash on Robinhood Markets Revenue: How HOOD Makes Money
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