Robinhood Markets (NASDAQ: HOOD) is a United States-based financial services company that aids in commission-free trading of stocks, exchange-traded funds, and cryptocurrencies over a mobile application platform. The stock has declined by close to 70% from its IPO price and is currently down by more than 30% year-to-date. HOOD stock is currently trading at $13 compared to its all-time high price of $85.
Robinhood has been crippled by regulatory concerns surrounding its payment for order flow revenue model. The post-COVID decline in cryptocurrency growth has further contributed to its massive decline. Now that the once high-flying fintech stock is trading at a depressing valuation compared to its peers, is it worth buying?
Robinhood crippled by controversies
Robinhood gained popularity amongst first-time investors because of its user-friendly, no commission, and game-like investing app. It not only provided stock alerts but also gave away free shares through various promotions.
This revolutionary application became extremely popular during the initial pandemic days with over nine million users getting on board. In January 2021, it gained further momentum when a group of retail stock traders on Reddit drove up the price of meme stocks like GameStop (NYSE: GME), AMC Entertainment Holdings (NYSE: AMC), and Bed Bath & Beyond (NASDAQ: BBBY).
However, Robinhood started restricting the trading of certain meme stocks. Users rebelled and alleged the company was conspiring to protect hedge funds. Though this allegation turned out to be false, Robinhood was under an obscure financial regulation for which it was required to put up billions of extra dollars to protect the extra risky trades.
Its users found out that Robinhood was actually earning money by selling details of orders of each of its customers to the market makers. They felt cheated and resentment towards the company increased. It was also condemned by both Republicans and the Democrats for halting trading as it was not beneficial for retail traders. All these controversies have contributed largely to the company’s loss of reputation.
Regulatory concerns surrounding HOOD stock
In June, Robinhood had to pay a fine of $57 million to the Financial Industry Regulation Authority as well as $12.6 million for the restitution of its users. This is because the regulatory body alleged the company had undergone a lot of regulatory lapses.
These include distributing false or misleading information, poor regulation of its own technology, improper due diligence or simply offering incomplete market data to its users. As per the 122-page report, more than 90,000 accounts were opened in Robinhood despite showing red flags for fraud. FINRA also found prior to 2020 there were frequent outages that kept clients from their accounts.
SEC Chair Gary Gensler said a ban was on the table for the company’s payment for order flow model which is already banned in regions like Britain, Canada, and Australia. Robinhood’s latest financials reveals that the company derives 80% of its revenue through this model so this ban can be a huge setback for the company’s operations.
Generating Losses
Robinhood’s profits have deteriorated largely in the past year. Its recent quarterly report revealed though the company’s total net revenues for the last three months of 2021 had increased by 14% to $363 million, it had generated a loss of $423 million translating to a diluted loss per share of $0.49.
For the full year 2021, however, its revenue showed a massive 89% improvement to $1.82 billion. However, it posted a loss of $3.68 billion compared to the income of $14 million a year ago. Compared to the previous quarter, Net Cumulative Funded Accounts have increased only by 1% while Monthly Active Users have decreased by 8%.
Robinhood has a sizeable customer base and has proven its agility amongst young retail investors. The company can cross-sell other financial products and services like crypto wallets, or fully paid securities lending to its 23 million funded accounts.
Analysts have a target price of $17.92 on the stock. It represents a 40% upside potential. Investors who are willing to take high risks might consider its shares as they are pretty cheap now.