Shares of popular trading app Robinhood (NASDAQ:HOOD) have been hammered in the past few months. HOOD stock has plunged more than 68% in the last six months, trading 84% lower than its 52-week high price. Its weaker-than-expected fourth-quarter results underscore the bear thesis, which points to a challenging time ahead in the post-pandemic world.
Robinhood’s management talked a big game when the stock went public last year. Claims of it becoming a mega-cap investment haven’t materialized with its stock in free-fall since its listing. Its management wants you to believe in the business’s long-term growth story despite the tribulations as we advance. Moreover, HOOD stock trades at over five times forward sales. Hence, it’s best to avoid placing your bets on a company with a questionable outlook and a lofty share price.
The Meme Stock Frenzy Is Over
The retail trading frenzy was perhaps the biggest stock market story in recent memory. Multiple ingredients contributed to the perfect storm of the meme stock frenzy.
With lockdown restrictions, weekly stimulus checks were handed out to people. Moreover, they were aided by the Federal Reserve’s monetary policy, which dropped the interest rate down to zero. Additionally, Robinhood introduced no-commission trading to add more fuel to the fire. It made trading incredibly easy for users who were predominantly first-timers having little knowledge of investing.
Prior to its IPO, we saw a proliferation of new customer accounts on the platform. However, judging from its recent quarterly results, it appears that its best days are behind it. Customer account growth has slowed down considerably in the past few quarters. Customer accounts reached 22.5 million during the second quarter last year, but by the fourth quarter, they increased by just 1% sequentially.
Similarly, its brokerage assets followed a similar pattern. Growing assets provide a strong source of net interest revenues if trading activity diminishes. However, the platform’s assets under custody were at $98 billion at the end of the fourth quarter, falling from its peak of $102 billion a couple of quarters ago.
Regulatory Risks Are a Concern for HOOD Stock
Robinhood primarily relies on transaction-based revenues, providing an obvious incentive to generate more order flows aggressively. The platform has done remarkably well to entice new users, but perhaps continued trading is not always the best course of action for them.
Account “churn” remains exceptionally high, and it has struggled to increase the average size of said accounts. It focuses on first-time investors who signed up in huge numbers during the pandemic. However, with the pandemic fade, the platform is likely to struggle for the foreseeable future.
Furthermore, Robinhood’s regulatory troubles are mounting, weighing down its stock. It recently agreed to a whopping $70 million settlement to The Financial Industry Regulatory Authority (FINRA) into giving options trading to unqualified investors. Similarly, Massachusetts could potentially ban the platform on allegations that it effectively “gamifies” investing and other predatory practices. With a reputation that’s sliding fast, it’s tough to see how new investors will want to invest in HOOD stock for the long haul.
HOOD stock has failed to live up to the investor expectations so far. Its business model is questionable and is built on a conflict of interest. Moreover, it appears that its business might not withstand the pressures of reopening. Therefore, it’s a rocky road ahead for the company, and it’s possible it may never recover.
On the date of publication, Muslim Farooque 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.
