Based on the confluence of platform convenience, pandemic-related protocols and youthful energy, Robinhood (NASDAQ:HOOD) would appear a no-brainer investment. Throughout the new normal, the company’s namesake app brought millions of millennials and members of Generation Z to the investment arena in a way that financial advisors prior to the global health crisis could only dream about. So, that’s a great reason to buy HOOD stock, right? Well, not quite.
Following the devastation of the May 9 session, which saw Robinhood shares give up more than 6% of market value, stakeholders of the popular trading app ended up staring at a wall of red ink. On a year-to-date basis, HOOD stock tanked more than 51%. What’s worse, CNBC reported that HOOD slipped over 70% from its initial offering price — a fate that mirrored that of Rivian Automotive (NASDAQ:RIVN) and UiPath (NYSE:PATH).
In case you might have the contrarian bug tempting you to gamble on HOOD stock, you should be aware that its downfall is at least partially justified (if not mostly so). Mainly, the underlying company produced a lackluster performance for its first quarter of 2022 earnings report. One of the lowlights included the monthly active user count, which slipped 10% year-over-year. Analysts regarded the loss as a major hit to Robinhood’s payment-for-order-flow business model.
For me, the main issue is that speculation giveth and it taketh away. Back during the initial wave of the coronavirus pandemic, the work-from-home pivot allowed Robinhood to attract new users with its gamified platform, obviously boosting the profile of HOOD stock. However, fueling this speculative fervor also meant that Robinhood’s predominantly young and impressionable base chased after several risky fare.
As an example, CNBC reported that trading in non-fungible tokens (NFTs) — a special class of cryptocurrency — spiked 21,000% to more than $17 billion in 2021. But given the fallout in the crypto space, retail traders collectively lack the funds to participate in new opportunities. Thus, the speculation that initially benefited Robinhood may have come back to torment HOOD stock.
Most problematically, if recessionary conditions impact the market and the economy, job losses will surely mount. That’s not going to help Robinhood’s cause, meaning that investors should be extremely cautious about the discount in HOOD stock. It’s not out of the question for it to be a value trap.
On the date of publication, Josh Enomoto 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.
