Robinhood Stock: Watch for a lower leg in Q1 earnings

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Robinhood Markets Inc. (NASDAQ: HOOD) is credited with pioneering commission-free trading with an easy-to-use brokerage platform. The company rode a wave of user growth during the early stages of the pandemic with the lure of strong market gains in its 2021 IPO. Unfortunately, HOOD shares have been nothing short of a disaster, down more than 70% in the past 6 months amid falling market number of active users, adding to concerns about long-term earnings prospects.

Our view is that weak market performance and more volatile trading conditions are the main headwinds to growth, directly affecting near-term finances. Ahead of the next Q1 earnings report, we believe HOOD may disappoint expectations while its valuation is likely still too high.

Summary of HOOD Basics

2021 was a big year for Robinhood as it added over 10 million funded accounts to the platform, reaching nearly $100 billion in assets under custody and driving 89% revenue growth. Indeed, these are impressive achievements that help explain the company’s peak valuation which briefly hit $60 billion last year.

That said, the problem here is understanding that these trends were simply not sustainable, with the most recent quarterly data disappointing. The stock’s current market cap of just under $10 billion highlights not only the reset valuation, but also what was likely unrealistic optimism at the top.

The company last released its fourth quarter results in late January with revenue of $363 million up 14% year-over-year, a far cry from the 131% increase recorded in the second trimester. By this measure, HOOD is no longer a “high growth” name, facing tough y/y comps. The other point here is that losses have accelerated. Negative Q4 EPS of -$0.49 reversed a slightly positive $0.02 in Q4 2020 when the company was still private.

High levels of equity compensation, totaling $1.6 billion in 2021, have increased spending. Excluding this amount, as well as the accounting procedure for a change in fair value of convertible notes and warrants, Adjusted EBITDA in 2021 of $34 million decreased from $155 million in 2020. Overall, the company is trying to invest in growth through more technology and headcount. The earnings trend is significantly lower here with negative Q4 Adjusted EBITDA at -$87 million which is expected to continue through 2022.

On the balance sheet, the company ended 2021 with $6.3 billion partly tied to IPO proceeds. Although the company does not carry long-term debt, which is a strong point on the cash side, negative earnings and ongoing cash loss will affect the balance sheet.

HOOD Metrics

source: IR company

Robinhood’s bad KPIs

The bulk of revenue is tied to trading volumes across different segments between stocks, options, and cryptocurrency trading. While trading is commission-free for users, Robinhood is compensated by routing orders to market makers for execution. The model based on the payment of order flow, essentially bringing liquidity to the markets, depends on more active users on the platform. Here, 17.3 million monthly active users in Q4 were down from 21.3 million in Q2. The result is that transaction-based revenue, while up 12% year-on-year, was down 42% from its peak of $451 million in the second quarter.

HOOD Metrics

source: IR company

We believe this is an issue going forward given the current market environment defined by weak equity returns with the S&P 500 (SPY) and NASDAQ-100 (QQQ) in or near territory correction from their 2021 highs, each down 8% and 12% respectfully this year. Individual stocks, especially the small caps and high growth names that traders are excited about, fared even worse with bigger losses.

Data by YCharts

In other words, it is difficult for Robinhood to convince a new group of investors to open an account and deposit money when the trading environment is tougher. This contrasts with the second half of 2020 and the start of 2021, when seemingly “every” stock just went up. Similarly, it is believed that many Robinhood investors may have been disappointed by poor market performance that is limiting overall trading activity this year.

The impact on Robinhood until 2022 is therefore twofold. First, we expect a further drop in the number of monthly active users for the first quarter. From there, Assets in Custody should also be impacted given the market value of open positions and unrealized gains in user accounts adjusting downward.

HOOD Metrics

source: IR company

Overview of HOOD Q1 results

The setup here is for a low Q1 report from Robinhood when it reports on April 28, after the market closes. The company last guided first-quarter revenue of ‘less than $340 million’, implying a 35% year-over-year decline on strong market performance which boosted trading activity in the first quarter of 2021. Curiously, the current market consensus is a bit stronger at $357 million, as an average of nine Wall Street estimates ranging from $328 million to $398 million dollars. We’ll take the bottom.

Robinhood Next Quarter Estimates

Looking for Alpha

There are other moving parts beyond the stock market. Robinhood has bet on cryptocurrency trading and digital assets as part of its long-term growth strategy. Robinhood has launched crypto wallets for all of its customers on the mobile app. The company is also set to integrate with Bitcoin’s “Lightning Network” (BTC-USD) which enables faster transactions for payments and transfers.

Here it is worth mentioning that crypto price action has been slow this year with Bitcoin (BTC-USD) down around 15% year-to-date and also 42% off its all-time high. from last year. This is another instance where weak market momentum has likely affected sentiment, especially among smaller traders as Robinhood’s target clientele.

The company also faces intense competition from crypto leaders like Coinbase Global Inc (COIN) which offers similar services through a crypto-specific platform. Even with a long-term bullish outlook on the crypto, we don’t see it moving the needle for Robinhood in the short term. For context, cryptocurrency trading accounted for less than 20% of total revenue in the fourth quarter.

For the year ahead, the market consensus is that Robinhood’s revenue will reach $1.8 billion, up just 1% year-over-year. Growth initiatives including payment options, international expansion and long-term investment tools are expected to again accelerate growth in 2023, targeting revenue of $2.6 billion dollars, up 41% year-on-year. We are skeptical of this pivot and see a downside to these estimates. The market does not expect HOOD to be profitable until at least 2025, implying more than $3 billion in losses over the period.

Robinhood revenue and EPS estimates

Looking for Alpha

When it comes to valuation, the silver lining is that HOOD is trading at a forward sales multiple of 5.6x or even 2x net of cash, well off the peak valuation when the stock was trading at a compared to multiple sales close to 25x. The bearish angle would say that this discount is warranted given current operating and financial trends and the outlook for recurring negative cash flow. Simply put, the stock may become cheaper still if the growth outlook is revised down.

HOOD stock PS ratio
Data by YCharts

HOOD Stock Price Prediction

Putting it all together, we have several reasons to be bearish on HOOD. As a quasi-fintech brokerage platform, the company is heavily exposed to financial market conditions and the reality is that recent quarter-over-quarter growth trends leave much to be desired. If the major equity indexes tumble, whether due to an impending recession or a slowdown in consumer spending, we expect HOOD to underperform again.

On this point, there is a component to the company’s operating outlook that is based on discretionary spending. Potential Robinhood customers who suffer from high inflation will be less likely to have additional assets to invest in trying their luck in stocks.

HOOD Stock Chart

Looking for Alpha

From the stock chart, it looks like the stock price around $10.50 has acted as a measure of technical support, bouncing off that level a few times in 2022. We see the risk tilting to the downside and price HOOD’s stock as a sell. In terms of price target, a breakdown of the Q1 report could open the door to $8.50, as our price target implies a price of 4 times the sales multiple on current 2022 consensus revenue. For most investors, the call here is simply to avoid HOOD in the face of poor fundamentals and too much uncertainty.

What we can say is that on the upside, certain things have to happen. For Robinhood, a potential resolution of the Russian-Ukrainian dispute would likely be positive for broader market sentiment and provide a boost to operational trends. If there is a scenario in which the stock market is going to rally sharply towards an all-time high and get high-growth momentum stocks offering multi-bagger returns, we would also expect Robinhood to benefit from such an environment. , although it is unlikely. in our view. For the Q1 report, user metrics and assets under custody are the main monitoring points.

About William G.

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