Robinhood (NASDAQ:HOOD) is undoubtedly a pioneer in the democratization of investing. The company was founded by two Stanford technologists less than a decade ago with a clear mission: “…give everyone — not just the wealthy — access to financial markets.” The premise of removing barriers for retail investors and allowing them to trade with zero commission, comes at an expense for HOOD stock, however: an imprecise monetization model that lacks clarity and future cash flow certainty.

Sure, that’s a hard thing for any business to accomplish, yet Robinhood has tough stakeholder expectations to manage. After all, it is a multibillion-dollar Nasdaq-listed entity with significant social and financial obligations, including millions of active users and “hungry” institutional investors.

A cutting-edge user-friendly technology accompanied by seasonal favorable market conditions might not be adequate to produce a profitable corporation that maximizes investors capital.

A Look Under the Hood in HOOD Stock

HOOD stock had its infamous IPO (initial public offering) in July 2021. Around that time, Robinhood had also faced a Security and Exchange Commission (SEC) backlash regarding its payment for order flow model. Nevertheless, the market capitalization of the company in August 2021 hit an astonishing $58 billion. At the time, the market was at all-time highs and the Federal Reserve policy of monetary expansion added more money into the economy — and directly into Robinhood consumer’s pockets.

Add that to the fact that retail trading was booming and meme stocks were at their peak, and you can see why the anticipated IPO appeared right during that time frame.

Fast-forward to today, the dust is starting to settle and the market selloff is taking place. The market is down more than 6% year-to-date and the price-earning ratio for S&P 500 Index (SPX) is down from 39.9 in Q4 2020 to 25.4.

A noteworthy catalyst to the market conditions is the Fed. Fed Chairman Jerome Powell is planning on frequent incremental rate hikes through 2022, a move that has been a long time coming after almost a decade of super-low interest rates.

Fundamentals

Currently, Hood stock is trending below a $12 billion valuation, a striking 60% drop since the IPO on July 28, 2021. The stock price is now trading around $14.

Fresh Q4 2021 earnings revealed that for the past three quarters, total net revenue has been steadily declining. Q4 2021 was at $363 million, Q3 2021 at $365 million and Q2 2021 at $565 million. The company is forecasting revenues to decline 35% in the current quarter.

Gross profit margin decreased from 75.43% to 58.25% from Q2 2021 to Q3 2021, before bouncing to 65.08% in Q4 2021. Loss before tax was $423 million in Q4 2021, down from $1.3 billion in Q3 2021.

Monthly Active Users (MAU) have also been falling for all three quarters, in a row. This has been sending concerning signals to the shareholders. For 2021 there were 17.3 million MAU in Q4, 18.9 million in Q3 and 21.3 million in Q2. Average revenues per user (ARPU) also fell in all quarters, from $112 in Q2 to $65 in Q3 and $64 in Q4.

Meanwhile, capital expenditures (capex) has been fluctuating: from $12 million in Q2 2021 to $24 million for Q3 2021 and $17.1 million for Q4 2021 — all without noticeable impact.

Barron’s has the HOOD stock price target right at $20.92, still an immense discrepancy from the $70 all-time high. Multiples are not necessarily attractive anymore for the growth stock, as it seems that the five-to-10-year business plan was accounted for in their IPO price.

Robinhood has now launched 24/7 phone support and has brought back the content creator affiliate program. The company has also completed their anticipated new crypto wallet product testing and aims to launch end of March. Robinhood is also further investing in its educational content, hiring seasoned executives, building first time trade recommendations, crypto reoccurring investments and IPO access.

Bottom Line on HOOD Stock

There are a few underlying conditions that will determine the long-term viability of the company. First is platform adoptability, determined as the number of active monthly users.

Second is the short/medium term stock market performance. Good market returns encourage trade volume. On the other hand, a bad market will discourage trading, hindering the company’s financial sustainability over the next few important years.

Lastly, the cryptocurrency adoption rate. It seems that crypto usage will be highly correlated to Robinhood’s balance sheet, considering its current business model.

In Q2 2021, when crypto was flourishing, crypto revenues for the broker accounted for 39% of their revenue. When crypto prices started failing, HOOD’s crypto profit started sinking, with Q4 2021 figure revealing $13% earnings from crypto.

It will be a certainly tough ride for the challenger broker to thrive, as growing competition is also putting HOOD stock to the test.

In light of my comments, I expect the stock to somewhat but not meaningfully recover from where it is now back to the mid $20s, in the short to medium term. The picture of the long-term stock performance is yet to be drawn due to the multiple unpredictable key factors.

All in all, I have my doubts about long-term stock performance.

On the date of publication, Jonathan Tang did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Jonathan Tang has gained extensive experience in the financial services industry in London. He has completed valuable projects for companies such as Bloomberg, London Stock Exchange Group and FactSet. He holds a master’s degree in Investment & Risk Finance and has completed an MBA course at the London School of Economics. Jonathan has a passion for fintechs that democratize investing, stock market and public equities, ETFs, start-ups and real estate.