For investors in the Robinhood Markets (NASDAQ:) IPO, it has been quite a wild ride since the company went public in late July. Shares of the financial services provider have been volatile, fueled by retail investors.
After more than doubling in the first 10 days of listing, the stock has given up much of its upward movement for signs that the Menlo Park, California-based company's fundamentals are not supporting the rally. Robinhood, which revolutionized trading markets with its easy-to-use, free platform during the pandemic, closed Friday at $42.64 and lost about half its value from its all-time high of $85 a month on Aug. part.
After a swing of this magnitude, HOOD may look attractive to many investors, but we recommend caution after reading the company's latest publication, released on August 18. In its first earnings report as a publicly traded company, last week it said second-quarter revenue more than doubled to $565 million compared to the same period a year ago. But those impressive performances don't tell the full story. A significant portion of that revenue figure comes from trading (DOGE), a cryptocurrency that originated as a joke. Robinhood executives did not single out Dogecoin during Thursday's earnings call, but they have declined to offer a revenue forecast because there is so much uncertainty in that company. it's difficult to accurately predict results in the short term," Robinhood CFO Jason Warnick said, according to CNBC.com.
"For the third quarter, we expect seasonal headwinds and lower industry trading activity to result in lower revenues and significantly fewer new funded accounts than we saw in the second quarter."
Income uncertainty
Cryptocurrency revenue in the second quarter was $233 million, up 4,560% from a year earlier, highlighting how the ever-changing preferences of retailers play a vital role in how much revenue the company generates. That figure surpassed earnings from stock and options trading combined. Dogecoin accounted for 62% of crypto revenue in the period.
The company's over-reliance on this highly volatile market segment shows that Robinhood has a long way to go before it can set itself on a truly solid growth path. That's the main reason why some analysts are advising investors to stay away from this name, despite the app's popularity with retail investors.
Wolfe Research, while lowering its price target for Robinhood from $45 to $41, said in a post-profit post that the slowdown in Dogecoin trading in the third quarter "could be much more acute than many investors had anticipated." ".
Added the note:
"HOOD's growth within Crypto is nothing short of remarkable, but DOGE's outrageous contribution simply cannot be ignored."
Regulatory Risk
In addition to the potential vulnerability associated with exposure to DOGE, there are other risks to Robinhood's earnings model that long-term investors should keep in mind as they are interested in this stock.
Robinhood is on a collision course with regulators over a controversial practice that generates the bulk of its revenue. HOOD revealed that 81% of its first quarter revenue came from sending customer orders on stocks, options and cryptocurrencies to high-speed trading companies – a practice known as order flow payment.
Securities and Exchange Commission chairman Gary Gensler said in June that the SEC was reviewing payment for the order flow, fueling speculation that the practice could be banned.
Robinhood's funded accounts reached 22.5 million customers as of June 30, compared to about 9.8 million a year earlier, according to the earnings report. This surge undoubtedly demonstrates Robinhood's popularity among retail investors who flocked to its app to push meme stocks, such as GameStop (NYSE:) and AMC Entertainment (NYSE:), higher and inflict pain on shortsellers who oppose the stock. bet. ]
But since its IPO, ironically, Robinhood itself has become a meme stock. Listings of the stock have skyrocketed in online forums such as Reddit's WallStreetBets, showing huge speculative interest in the stock. We believe that this is also a no-go area for long-term investors.
Bottom Line
Robinhood's latest earnings show that the company's sales can be very volatile given its massive reliance on crypto trading. In addition, there is significant regulatory risk that makes the revenue stream even more uncertain. Long-term investors, in our opinion, should steer clear of this stock.
