Robinhood Stock Is a Good Trading Bet at Current Levels


The price action for Robinhood (NASDAQ:HOOD) stock is a clear reflection of the meme stock craze.

A magnifying glass zooms in on the website for Robinhood (HOOD).

Source: dennizn / Shutterstock.com

When HOOD stock listed and surged to highs of $85, the meme stock trading was at its peak. Robinhood became the millennial-favored stock trading app.

However, as it was destined to be, the meme stock trading craze has continued to decline. This has impacted HOOD stock. Robinhood also benefited from the trading euphoria in meme coins in the cryptocurrency segment. Even for cryptocurrencies, speculative trading activity declined on a relative basis.

With slower growth being discounted in the stock along with lack of positive catalysts, HOOD stock has declined by 70% in the last six months.

However, the stock made lows of $9.93 in the recent past. Currently, HOOD stock trades just over $11. I believe that there is scope for further upside in the near term from deeply oversold levels. This is purely a short-term trading perspective.

As a long-term investor, I would prefer to be on a wait-and-watch mode. Robinhood is taking various initiatives to accelerate growth. The coming quarters will provide further insight on the impact of the growth plans.

Possible Growth Triggers for Robinhood

For Q4 2021, Robinhood reported revenue growth of 14% to $363 million. Clearly, sluggish top-line growth is a concern when initial valuations discounted a robust growth trajectory.

Looking into specifics, transaction-based revenue increased by 12% to $264 million. This revenue growth was driven by the options and cryptocurrency segment. However, on a year-on-year basis, revenue declined in the equities segment.

The segment that provides a glimmer of hope is cryptocurrencies. For Q4 2021, revenue increased by 304% to $48 million. It’s therefore not surprising that Robinhood is focused on the crypto segment for growth in 2022.

On the flip side, Robinhood reported revenue of $233 million from the crypto segment in Q2 2021. While growth has been robust on a year-on-year basis, the numbers clearly indicate the decline in trading activity. Rise in trading and speculative activity is the bread and butter for Robinhood.

For 2022, Robinhood has two important plans in the cryptocurrency segment that can boost growth.

First, crypto wallet is slated for launch in Q1 2022 with the beta version live. Robinhood will also enable crypto gifts that will allow investors to send crypto to family and friends.

Further, Robinhood plans to take its crypto trading platform global. There is a big addressable market. It’s expected that the number of global crypto owners will touch 1 billion by the end of 2022.

The challenge for Robinhood would be to increase market share amidst high competition. Early trends from international expansion will provide some insight on the possible growth.

Financial Flexibility for Growth

As of December, Robinhood reported $6.3 billion in cash and equivalents. The company has ample financial flexibility to pursue aggressive global expansion and product development.

Robinhood reported adjusted EBITDA loss in the last two quarters. However, the company has guided for possible positive EBITDA in 2022. The company expects EBITDA growth to gain traction in 2023.

A key reason for decline in adjusted EBITDA has been a drop in average revenue per user. For Q4 2021, the ARPU was $64 as compared to a high of $137 in Q1 2021. This is directly linked to the level of trading or speculative activity. It’s unlikely that the ARPU will re-test the highs. However, EBITDA margin expansion is likely through strong growth in user base.

Overall, Robinhood is fully financed for the next 12 to 18 months. If EBITDA margin can accelerate during this period, the prospects of further equity dilution will be low.

Concluding Views on HOOD Stock

Robinhood is also planning to launch a spending account service along with the upcoming Robinhood cash card. The company aims to make Robinhood as the “only app that people use on their phones for money.”

Currently, there are some exciting growth plans on paper. It remains to be seen if these plans translate into accelerated growth.

After a deep correction, HOOD stock provides investors with a quick trading opportunity. The next few quarters will determine if the company can survive and grow.

On the date of publication, Faisal Humayun did not hold (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.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.



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