Trading platform Robinhood Markets (NASDAQ:HOOD) went public and started trading on July 29, 2021 at an opening price of $38 per share. Then, on Aug. 4, HOOD stock hit a record high of $85.
However since that peak, shares are down by about 78%, now, as of writing, trading at around $18.5. The stock’s 52-week range has been $16.68 – $85.00, while the market capitalization stands at $15.9 billion.
In other words, the pre-initial public offering (IPO) positive sentiment surrounding the trading app is no longer there. In recent months, lukewarm third-quarter results and the weak fourth-quarter outlook have weighed on the share performance.
Next, we will look at what to expect from HOOD stock in the coming months. Long-term investors with a two to three-year horizon could consider buying Robinhood shares around these levels.
Robinhood’s Q3 Results
Robinhood issued third-quarter financials on Oct. 26. Total net revenue increased by 35% year-over-year (YOY) and was $365 million. However, the top line still fell short of consensus estimates of $489 million.
When we take a closer look at the revenue breakdown, we note that the Transaction-based revenue went up by 32% to $267 million. A year ago, that number had been $202 million in the third quarter. Within those transactions:
- Options went up by 29% YOY to $164 million
- Cryptocurrencies went up by 860% YOY to $51 million
- Equities decreased 27% YOY to $50 million.
Meanwhile, Robinhood’s monthly active users (MAUs) and the average revenue per user (ARPU) dropped sequentially, or quarter-over-quarter. MAU which was 21.3 million in the second quarter, declined to 18.9 million in Q3. Similarly, ARPU in Q2 was $112. But in Q3 it came in at $65.
Finally, net loss was $1.32 billion for the third quarter, or $2.06 loss per diluted share. Wall Street was not impressed.
On the results, CEO Vlad Tenev said:
This quarter was about developing more products and services for our customers, including crypto wallets. More than one million people have joined our crypto wallets waitlist to date. With 24/7 live phone support, we believe that Robinhood is becoming the most trusted and intuitive platform for retail and crypto investors.
Management shared its outlook for its fourth quarter as well. Accordingly, HOOD expects headwinds, mainly lower trading activity during the quarter. Hence, the company anticipates that Q4 revenue won’t exceed $325 million.
Prior to the release of the quarterly results, HOOD stock was around $39.50. On Dec. 29, it saw an all-time low of $16.68.
Adding HOOD Stock To Portfolios
Among 15 analysts polled, HOOD stock has a “hold” rating. Also, the consensus of 13 analysts for the 12-month median price target stands at $38, implying an upside potential of over 100% from current levels. The 12-month price estimates currently change between $17 and $58.
HOOD shares trade at 9.73 times trailing sales and 2.34x book value. These valuation metrics imply that despite the decline in price, the stock is not necessarily cheap. By comparison, these numbers for Morgan Stanley (NYSE:MS), which owns the online broker E*TRADE, stand at 3.26x and 1.80x.
Long-term investors who are not concerned about short-term choppiness in Robinhood stock could consider investing around current levels. Their price target should be analysts’ estimate of $38.
Others who are interested in HOOD stock but want to diversify some of the risk away could consider investing in an exchange-traded fund (ETF) that holds Robinhood as well. Examples would include the Amplify Digital & Online Trading ETF (NYSEARCA:BIDS), the ARK Innovation ETF (NYSEARCA:ARKK), the Roundhill MEME ETF (NYSEARCA:MEME) and the Valkyrie Balance Sheet Opportunities ETF (NASDAQ:VBB).
Cash-Secured Puts on HOOD Stock
Finally, those readers who are experienced in options could also consider selling cash-secured puts. This strategy may be appropriate if you are slightly bullish or neutral on HOOD stock at this time.
Selling cash-secured put options generates income as the seller receives a premium. Recently, HOOD stock has been trading around $18.50. If you sold the $17 strike put that expires on Feb. 18, you could collect about $1.40 in premium. Therefore, the maximum return for the seller on the day of expiry would be $140, excluding trading commissions and costs, if the option expires worthless.
If the put option is in the money (meaning HOOD stock is lower than the strike price of $17) any time before or at expiration on Feb. 18, this put option can be assigned. The seller would then be obligated to buy 100 shares of HOOD stock at the put option strike price of $17 for a total of $1,700 per contract. In that case, the trader ends up owning HOOD stock for $17 per share, about 8% below the current price.
If the put seller gets assigned shares, the maximum risk is similar to that of stock ownership (the stock could theoretically fall to zero) but partially offset by the premium received ($140 for 100 shares).
The Bottom Line
Robinhood has been one of the success stories of 2020 as a large number of retail investors became customers of the trading app. However, since going public, shares have fizzled out and lost significant value.
In the second half of 2021, many investors began moving away from the early darlings of Covid-19. In other words, we now have a more risk-off investing sentiment that pays more attention to fundamental metrics. Wall Street would indeed like to see more customers, higher transaction levels, and improved monetization metrics from Robinhood — positive developments that could take months if not years.
Yet, if you are a long-term investor whose portfolio can handle volatility, then January could be an appropriate time to buy HOOD stock. Meanwhile, the company could also find itself a takeover candidate.
On the date of publication, Tezcan Gecgil 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.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.