Vice-Chairman of Berkshire Hathaway Charlie Munger has slammed investment app Robinhood (NASDAQ:HOOD), claiming it does not adhere to the principles of good capitalism. This lack of confidence from one of the most prominent money managers is yet another bit of bad news for HOOD stock, which has fallen 45.2% in the year thus far.
Robinhood doesn’t charge commission and generates most of its revenue from payment for order flow (PFOF), which means the fund’s payment providers receive when a trade is executed. The app became popular during the pandemic, when people had more money to play with because of Covid-19 stimulus money.
Hence, the markets saw a huge inflow of cash due to new investors buying stocks for the first time. It’s been playing a key role in the Reddit stock trend since 2020. Investors are using markets and apps to take advantage of this situation, taking some very aggressive bets.
Many investors went to the app and pushed prices higher. However, Wall Street members and investors hope for something different this year. Munger has been very critical of Robinhood’s business model, which speaks to its approach. Warren Buffett mirrored Munger’s sentiments, and both have spoken at length about their thoughts on the issue.
Robinhood responded to Munger’s comments, saying he does not understand how consumers and the app interact with the platform. Despite the massive growth the company has had since its launch, it is currently suffering from a huge drop in its stock price.
HOOD stock is in a very poor state because of a decrease in its monthly active users and struggling financials. It seems it’s not likely to see any significant changes in the near future.
Robinhood offers a lot of benefits for its users. It provides all its trades commission-free, but it also has a lot of functionality that can be beneficial depending on the user’s needs. However, things are not great for the company right now. Pandemic-era relief is drying up, and that is showing.
Its total net revenue fell 43% year-over-year to $299 million for the quarter. The brokerage group reported a $392 million quarterly net loss, a sharp change from a net loss of $1.4 billion in the year-ago quarter. Both of these numbers did not meet analyst expectations.
Robinhood’s transaction-based revenue from cryptocurrencies fell 39% in the latest quarter to $54 million because of the crypto space’s headwinds. The number of monthly active users on the platform suffered a 10% drop for March 2022.
Robinhood has had a young customer base, with a mix of customers in their 20s and 30s. Most of its users have been accustomed to low interest rates, low inflation and endless market growth — but that is no longer the case.
In response, the company has said it is looking to streamline operations. After assessing the situation, Robinhood is aiming to reduce its staff by about 9%. It cites lower headcount growth rates and some duplicate labor-intensive roles for layoffs.
Considering the risks associated with HOOD stock, it is a dangerous investment at the moment.
On the publication date, Faizan 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.
