A Robinhood Stock Comeback Could Prove Challenging

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Much like the meme stocks many of its clients like to trade, Robinhood (NASDAQ:HOOD) has taken a beating. Year-to-date (YTD), HOOD stock is down 23.4%. Since hitting an all-time high of $85 per share shortly after its July 2021 initial public offering (IPO), it is down 84%.

Robinhood stocks: app logo seen on smartphone on US dollar banknotes
Source: mundissima / Shutterstock.com

Despite its corporate name that suggests otherwise, this discount broker hasn’t taken from the rich to give to the poor. Rather, it has provided ample returns for short sellers betting against it since its debut at the expense of individual investors who bought into the stock.

Sure, with its massive decline, Robinhood may have already bottomed out. From here, as things stabilize, it could start making a recovery, right? Yes and no. Now trading at a lower price-to-sales (P/S) ratio than Charles Schwab (NYSE:SCHW), it may not be at risk of dropping big again on valuation grounds.

Still, its growth is highly dependent on fads and trends. As the popularity of cryptocurrency and meme stocks decline, it will be difficult for its trading volume and payment for order flow (PFOF) revenue to rebound. Although it is pursuing new revenue streams, as its bread-and-butter business keeps struggling, expect it to be a long slog back to growth mode. With this, there is little reason to dive in today.

Why HOOD Stock Has Yet to Bottom Out

Again, given its massive stock price decline, it may appear that things cannot get worse for Robinhood. That is, the market has already absorbed the fact that its revenue of $340 million this quarter will come far below the estimate of $448.2 million for the first quarter (Q1).

Furthermore, its share price today also reflects the prospect of basically zero revenue growth this year versus last year. Analyst estimates call for revenue of $1.81 billion. That is about what it reported for 2021. With so much bad news already factored in, further price declines for HOOD stock, if any, could be minimal.

But while that may mean further losses might be limited from here, don’t take this to mean a quick trip back to higher prices.

Yes, expect to see a rough patch this year. Estimates state that growth will re-accelerate starting in 2023. That year, the sell-side believes Robinhood will see a 37.9% bump-up in its top line. Its net losses could narrow significantly, as well.

Even so, there are many factors that could prevent this from happening. Without a return to growth mode, it’ll be difficult for it to make much of a recovery.

Dim Chances Two Key Trends Make a Comeback

Severely beaten down in price, HOOD stock could make a partial recovery and still be a big winner for investors buying it today. Yet, just because there is the potential for it to make a recovery doesn’t necessarily mean one will actually happen.

This is mainly because, for now, a comeback in its growth, and in turn its share price, hinges on the crypto and meme stocks seeing a rebound in popularity. Unfortunately, it is hard to see either one getting back to its peak popularity seen in the first half of last year. In the days following Russia’s Ukraine invasion, it may have seemed cryptocurrencies like Bitcoin (BTC-USD) and Ethereum (ETH-USD) were possibly making a comeback.

However, the specter of increased regulation and higher interest rates has again outweighed this. The “crypto winter” could extend into the other three seasons. What if crypto remains in a bear market? It is doubtful we’ll see too many retail traders jump back into it, as seen a year ago. And as for meme stocks? It is a similar situation.

Meme stocks, including the top ones like AMC Entertainment (NYSE:AMC) and GameStop (NYSE:GME) are down tremendously. The self-described “apes” may be holding on. But their holding doesn’t help Robinhood much, as it depends on heavy trading volume in order to receive PFOF from market-makers. As a bear market for meme stocks keeps more fair weather participants at bay, retail stock trading volumes aren’t going to come back, either.

The Bottom Line on HOOD Stock

As I mentioned above, Robinhood is now pursuing alternative revenue streams. As one bullish analyst, Mizuho’s Dan Dolev, argued last month, areas like retirement products could help re-accelerate its average revenue per user (ARPU) growth.

Rising interest rates could provide a small positive for the company, as it also generates a fair amount of its revenue from net interest income. But when will it prove that it can move beyond PFOF and have a more diversified revenue mix, like other fintech companies?

It is going to be a while before HOOD stock begins to pick back up in price. For now, stick to hard-hit names with greater rebound potential.

On the date of publication, Thomas Niel held long positions in Bitcoin and Ethereum. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.


Article printed from InvestorPlace Media, https://investorplace.com/2022/03/hood-stock-a-robinhood-comeback-could-prove-challenging/.

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