Robinhood (NASDAQ:HOOD) went public on July 28 with an initial public offering (IPO) price of $38. HOOD stock gained over 56% the first week after it went public, closing at $55. Unfortunately, the stock lost more than 76% of its value by January of this year, and it has been hovering around the price of $12 for the past two months until Monday.
After all, Robinhood’s stock price has not only slowed its decline considerably, it has also made significant gains this month. This was exacerbated by news that Robinhood would extend trading hours on its app.
The slowdown in decline and the recent price turnaround has led many to think that Robinhood has bottomed out.
Of course, stocks such as HOOD are challenging to estimate accurately. Robinhood’s profits are indirectly tied to other highly speculative assets, such as cryptocurrency. For example, crypto trading accounted for around 20% of Robinhood’s revenue, and 40% of that crypto revenue was from Dogecoin (DOGE-USD) alone in 2021.
Moreover, Robinhood is usually the go-to platform for people who wish to invest in high-risk assets. As a result, the revenue is very inconsistent compared to other companies.
HOOD Stock Does Not Seem Too Undervalued
HOOD has declined by around 80% from its high, but it is crucial to mention that the decline can likely be attributed to its highly overvalued market capitalization when it held its initial public offering (IPO). Robinhood had a $22 billion market cap at launch, and it reached almost $45 billion in a week. Meanwhile, that same year Robinhood reported a net loss of $3.7 billion.
Unfortunately, Robinhood is still unlikely to be profitable in 2022. The company has been working towards that goal, but Robinhood’s declining userbase could spell trouble in the short term. Moreover, Robinhood is likely to face even more competition from companies such as eToro.
Fortunately, the decline is unlikely to last long if the market recovery continues.
As for the competition, Robinhood is undoubtedly very innovative. It was the first platform to allow commission-free trading, and it made trading stocks extremely easy for even inexperienced traders. Now it’s extending trading hours for users. If this trend of an innovative business model continues, it is likely to keep being the most popular option for commission-free trading for years to come.
In short, there are no immediate threats that should rule out a buy. However, it is still riskier than the average stock.
Is the Risk Worth the Potential Reward for Robinhood?
The current vertical price action of Robinhood certainly looks very risky for the short term. It does not seem to be a comfortable buy at this point in time. HOOD shot up by nearly 26% today.
Of course, as with any stock that goes up by this much in such a short amount of time, one should expect some sideways or downwards price action for the short term. Moreover, It seems very unlikely that HOOD can sustain the current growth rate. Thus, if you wish to buy Robinhood, then you should aim to do it once the stock shows any signs of stability and consistency, ideally after a pullback.
As I’ve mentioned before, any future price target for the stock is difficult to predict, and price targets from professionals vary significantly. According to Alphaspread, HOOD is overvalued by as much as 50% in a bear scenario. However, if the bull market persists, it is undervalued by around 28%. Wall Street professionals also forecast anywhere from a 25% downside to a 192% upside to Robinhood in the next 12 months.
Thus, due to the recent price action, I believe that you should buy HOOD stock for the long term but start small. There is still a significant chance of a correction as the spike is very recent, and it is better to be safe than sorry.
On the date of publication, Omor Ibne Ehsan 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.