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Robinhood Markets Has a Peter Pan Problem

When I looked at Robinhood Markets (NASDAQ:HOOD) stock last month, I said it risked becoming generic. Since then, HOOD stock has extended its post-IPO decline by another 2.95%.

A magnifying glass zooms in on the website for Robinhood (HOOD).
Source: dennizn / Shutterstock.com

There’s nothing special about trading from an app, I wrote. Companies like Charles Schwab (NYSE:SCHW) also allow trading in fractional shares, and collect payment for order flow. Competitors like PayPal (NASDAQ:PYPL) let you dabble in crypto.

But there’s a bigger risk for Robinhood stockholders than becoming just another trading platform. That is remaining wedded to the young, active traders who made it famous. The “Bros” may not keep playing if they lose money. At some point, we all do.

They might prefer placing bets on the football.

Boyz n the HOOD Stock

Since coming public on July 29 at $38 a share, Robinhood has seen a short-term pop to $70 quickly fade. It closed Oct. 11 at pennies above $42. That’s still a market cap of $35 billion on what’s expected to be $2 billion in revenue. It’s still trading like a tech stock, not an investment bank.

As I write this, Robinhood is being hit by a Securities and Exchange Commission (SEC) filing criticizing crypto trading and payment for order flow.  That’s most of the business model. Getting paid by companies such as Citadel Securities for executing trades lets Robinhood offer them free to customers. Crypto is a hot trade among the young men who make up the bulk of its user base. But eventually, these Lost Boys will leave Peter Pan.

There’s another short-term risk in Hood stock. Early investors want to sell. Until those who came into the stock for pennies get their dollars, the share price will remain under pressure.

Beyond Gaming

You’re always taking a risk when you invest. Insurers take risks when they sell you an auto policy.

But there’s a difference between taking risk and outright gambling. That’s how the SEC sees it, anyway.  Day traders calling gambling hotlines don’t make for a healthy market.

So far, Robinhood is standing up to the pressure. Its small traders revel in the criticism and the attention it brings to names like GameStop (NYSE:GME), whose price has yet to return to fundamental value. Robinhood is telling regulators that Republican courts may take a dim view on their proposed rulemaking.

But Robinhood needs new growth. It also needs new ways to “stick it to the man,” so long as “the man” is not those who run Robinhood. One way is to support corporate democracy, as it did in buying Say Technologies last month for $140 million.

Say brings Robinhood into the world of proxy voting. Almost 40% of shares are held by individuals. But we seldom vote on directors or shareholder resolutions. Say makes it easy to do that, and to research the issues. It also gives Robinhood traders, at an average age of 31, another way to play at being hedge funds, which bully their way onto boards and force sales based on small stakes. Turning that potential into power could drive engagement and engagement is growth.

The Bottom Line

So far, Robinhood is focused on serving small traders it brought to the investment party.

A 24/7 phone support line isn’t new among stock traders. But it is new in crypto, and crypto prices continue to rise.

What that means for investors in HOOD stock is unclear. It is inevitable that Robinhood eventually becomes an institution. Investment institutions don’t sell for 17 times revenue.

The best reason to hold Robinhood today is in hopes it will be sold, to a company like JPMorgan Chase (NYSE:JPM) that needs its niche. But buying for a sale is a mug’s game. Robinhood’s valuation is too dear to merit a purchase.

We’re left with a bet on CEO Vlad Tenev, a newly minted Bulgarian billionaire, and co-founder Baiju Batt, the son of Indian immigrants. Ah, America, where the streets truly are paved with gold.

I like betting on young go-getters. But I have no idea what these go-getters are getting this aging investor. I’m not betting blind.

On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.

Article printed from InvestorPlace Media, https://investorplace.com/2021/10/robinhood-markets-has-a-peter-pan-problem/.

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