Robinhood Markets Inc. (HOOD, Financial) is one of the most popular stock brokerage platforms in the U.S, having pioneered the concept of “free trading.” The company’s platform experienced a major surge in popularity during the Covid-19 lockdown of 2020, as many stimulus check-fueled consumers took to the app to invest in stocks. This was a perfect storm for Robinhood as meme stocks became popular among users of its platform. However, the Gamestop (GME, Financial) short squeeze signified the peak of this exuberance, as the company put the trading of the stock on hold on its platform.
This caused outrage among many users at the time and several conspiracy theories surfaced in regard the company’s relationship with Citadel Securities, a market-making firm which executes many of the orders submitted by Robinhood customers. A court ruling later dismissed these allegations.
During a similar period, the high inflation numbers for the U.S were first announced and a major sell-off in growth stocks ensued. As stock prices fell, trading slowed down and Robinhood’s share price was butchered by over 72% from its initial public offering price.
A positive for the company is its share price may be getting close to value territory, which could be why many gurus have recently invested in the stock.
Mixed fourth-quarter financials
Robinhood recently reported mixed financial results for the fourth quarter of 2022. Revenue of $380 million missed analysts' expectations by $15.16 million, despite increasing by 4% year over year.
This may not seem like a fast growth rate for a growth company, and it is not. However, in comparison to prior quarters, it was an improvement. In the third quarter of 2022, the company reported 1.1% year over year decline and in the second quarter, Robinhood reported an atrocious 43% decline in revenue.
Therefore, the trend moving into 2023 is positive and could signal a bottom in terms of revenue and the stock price.
A major positive for Robinhood is it increased its monthly active users by 600,000 in January, bringing the total to 12 million MAUs on the platform.
In addition, its net funded accounts rose to 23 million in January, up by 60,000 since the end of 2022. Its assets under custody have also increased by 20% since December to $74.7 billion.
These are all immensely positive signs for Robinhood that could signal a return of retail trading activity. For example, many artificial intelligence stocks, such as C3.AI (AI, Financial) and SoundHound (SOUN, Financial), have skyrocketed by over 90% recently, which may have been driven by retail momentum. Although the trading volume is not as extensive as the prior short squeezes, given the tepid macroeconomic environment, it is a positive sign.
Breaking down Robinhood’s trading volumes for January, the equity trading volume increased by a solid 19% to $46 billion. In addition, options contracts rose by 10% to 82.9 million, which is usually a sign of bullish momentum.
Robinhood's cryptocurrency trading volume also increased by a surprising 95% to $3.7 billion. This was after an eye-watering 24% decline in crypto revenue to $39 million in the fourth quarter of 2022. The company launched crypto wallets in the first quarter of last year, which was quite late relative to other companies such as Block (SQ, Financial) and Coinbase (COIN, Financial). However, the company still managed to generate a waiting list of 1.6 million users pre-launch.
Since that point, the company has continued to bolster its crypto platform by offering detailed explanations of terms such as “network fees” and “transaction ID,” which can still confuse many users. In addition, the company offered 24/7 call support to help its platform users. Robinhood has also partnered with a blockchain data analytics company called Chainalysis to help meet the necessary compliance and build trust with its platform. This is especially important given the recent collapse of the FTX crypto exchange.
Further, the company introduced a cash sard in partnership with Mastercard (MA, Financial) to help increase the use of its brokerage account. I believe this is a great strategy as it means users are more likely to use their Robinhood account multiple times per day, as opposed to just when they are planning to trade.
Profitability challenges
Moving onto profitability, Robinhood reported a loss of 19 cents per share, which missed analysts' projections by 7 cents.
However, the company’s losses have narrowed from $484 million in the fourth quarter of 2020 to a $156 million loss in the same period of 2022.
The company also has a strong balance sheet with cash and cash equivalents of $6.33 billion. In addition, the company has $1.9 billion in total debt, which looks to be manageable given the strong cash position and the majority is long-term debt.
Valuation and guru investors
Robinhood trades at a price-sales ratio of 6.2, which is cheaper than its prior levels.
In terms of guru investors, Robinhood appears to have been a fairly popular stock in the fourth quarter of 2022.
Value investor Joel Greenblatt (Trades, Portfolio)'s Gotham Capital opened a new position, loaded up on 14,461 shares, which traded at an average price of $9.80 per share during the quarter. Given Greenblatt tends to invest in companies that are undervalued but also offer growth potential, this is a positive sign.
The legendary Paul Tudor Jones (Trades, Portfolio) of Tudor Investment Corp. also purchased 244,460 shares during the quarter.
The world's largest hedge fund, Bridgewater Associates (founded by Ray Dalio (Trades, Portfolio)), increased its holding by 339.35%, bringing the total to 294,609 shares. Given Dalio's firm tends to look for investments with an “asymmetric risk-reward” profile, this is another good sign.
Final thoughts
Robinhood is a true pioneer in the stock trading world, having “democratized” trading for many individuals. Many brokerages have also now followed suit and offered free trading in order to maintain competitive.
The company is still facing many headwinds from the macroeconomic environment surrounding growth stocks, but the recently announced positive figures for January do not seem to have been fully taken into account by the market yet. Despite a disappointing fourth quarter, the recent numbers indicate a turnaround is a possibility.
