Robinhood Markets (NASDAQ:HOOD), the zero-commission on-line brokerage in style amongst millennials, has seen its inventory value decline by about 16% over the past week (5 buying and selling days) to about $47 per share. This compares to the S&P 500 which was up by roughly 1% over the identical interval. Though there wasn’t a lot adverse information regarding the corporate up to now week, Robinhood has emerged as a “meme” inventory of types, with its value motion dictated by curiosity from retail merchants and different technical elements corresponding to its float. The corporate allotted about 35% of its IPO shares to retail traders and likewise had comparatively lax IPO lockup guidelines, translating into a better float and extra volatility. Furthermore, the inventory noticed a serious rally submit its itemizing, rising by as a lot as 85% from its IPO value of about $38 at one level earlier this month and this has seemingly brought on traders to ebook some income.
So is the inventory a purchase at present ranges? Whereas Robinhood has fared effectively in recent times because it stays the go-to app for millennials trying to commerce shares, we predict the inventory is a bit overvalued buying and selling at nearly 20x ahead revenues. Though the valuation is partly justified by the corporate’s strong progress, with gross sales anticipated to roughly double this 12 months, there are dangers as effectively. With inflation on the rise and the U.S. Federal Reserve taking a look at price hikes for 2023, a 12 months forward of preliminary expectations, there’s a powerful chance that the inventory markets may see restricted positive factors or perhaps a correction, impacting brokerage companies. Robinhood is extra depending on buying and selling revenues and may very well be extra adversely impacted by a pullback in comparison with rivals, who rely extra on curiosity revenues. The corporate’s enterprise mannequin of producing income through Fee for Order Movement (PFOF) has additionally proved considerably controversial. The SEC indicated that it was reviewing the PFOF mannequin and this might additionally create an overhang on the inventory.
We worth Robinhood inventory at about $39 per share, indicating a draw back of about 17% from the present market value. See our evaluation on Robinhood Markets Valuation: Is HOOD Inventory Costly Or Low cost? for extra particulars on HOOD inventory’s valuation and comparability with friends.
[8/4/2021] Robinhood inventory: What are the dangers?
Robinhood Markets (NASDAQ:HOOD), the zero-commission on-line brokerage, went public final week. Though the inventory was off to a rocky begin, with costs briefly dipping beneath the IPO value of about $38 per share, it now trades at about $47 per share, giving the corporate a market cap of roughly $40 billion. Robinhood has quite a bit going for it, because it stays the go-to app for millennials trying to commerce shares, with progress surging via the pandemic. For instance, funded accounts rose to over 22 million as of June 2021, up nearly 4x for the reason that finish of 2019. The corporate additionally has a fast-growing cryptocurrency enterprise and with its massive and engaged consumer base, it’s doable that it may enterprise into offering different monetary companies as effectively. That being stated, we see a few key dangers for the inventory at this level.
The S&P 500 is now up by over 90% from the lows of March 2020. With inflation on the rise and the U.S. Federal Reserve additionally taking a look at price hikes for 2023, a 12 months forward of preliminary expectations, there’s a powerful chance that the inventory markets may see restricted positive factors or perhaps a correction, impacting brokerage companies. Whereas it is a threat that every one brokers face, the influence on Robinhood may very well be extra pronounced as the corporate largely caters to first-time traders who may cut back on buying and selling as markets decline. Furthermore, Robinhood seems to be extra depending on transaction-related revenues (fee for order circulation) versus its friends. About 75% of the corporate’s revenues have been depending on transactions final 12 months. Compared, E-Commerce, now acquired by Morgan Stanley, derived roughly 65% of its revenues from curiosity revenue in 2019.
Robinhood’s bread-and-butter fee for order circulation enterprise – which entails promoting the order circulation of its retail prospects to market makers and high-frequency buying and selling corporations – can also be controversial, with critics arguing that it may successfully give retail traders a worse value on their trades. In June, the SEC indicated that it was reviewing fee for order circulation, inflicting some hypothesis that the follow, which is already unlawful in international locations such because the U.Ok., may very well be banned within the U.S. as effectively. Whereas PFOF has roughly change into a normal follow for Robinhood’s rivals corresponding to Charles Schwab and E-Commerce, they’re much less depending on it as a income stream, given their bigger interest-related revenues and different companies.
Individually, there are some technical elements that would influence the inventory. The corporate stated that it could promote about 35% of its IPO shares to retail traders. That is in distinction with different firms who’ve usually allotted effectively beneath 10% of the inventory on the market to people, setting apart a bulk of inventory for institutional traders and high-net-worth people, who usually have a longer-term funding horizon. This might make the inventory extra prone to large actions. For instance, the inventory rallied by 24% on Monday alone, for no obvious purpose. It’s seemingly we may see comparable swings on the draw back as effectively. Robinhood additionally has looser submit IPO lockup guidelines. Insiders have been allowed to promote 15% of their holdings from the time the corporate went public, with one other 15% apparently being freed up inside three months. This might translate into a better provide of inventory, placing strain on the inventory value within the close to time period.
See our evaluation on Robinhood Markets Valuation: Is HOOD Inventory Costly Or Low cost? for extra particulars on HOOD inventory’s valuation and comparability with friends.
[7/22/2021] How Does Robinhood Markets Make Cash?
Robinhood Markets, the zero-commission on-line brokerage in style with millennials, is predicted to go public subsequent week buying and selling below the ticker HOOD on the Nasdaq. The corporate will supply shares at between $38 to $42 apiece, probably translating right into a valuation of as a lot as $35 billion. In our dashboard Robinhood Markets Revenues: How Does HOOD Make Cash? we offer an summary of Robinhood’s enterprise mannequin and its key income streams. Elements of the evaluation are summarized beneath.
Robinhood’s Enterprise Mannequin
Robinhood is a web-based brokerage that provides commission-free trades of shares, exchange-traded funds, and cryptocurrency. Though Robinhood doesn’t straight cost its customers for trades, it primarily makes cash from market makers and frequency buying and selling corporations who pay for the order circulation from its retail merchants. Funds for order circulation, or PFOF, accounted for roughly 75% of the corporate’s income final 12 months. Moreover, Robinhood additionally earns income from curiosity on securities and margins loans. The corporate additionally presents different companies together with the Robinhood Gold premium subscription service, which provides customers entry to options together with skilled analysis and margin buying and selling.
How Have Revenues Trended?
Robinhood has seen its transaction-based revenues develop 320% from round $170 million in 2019 to about $720 million in 2020. In Q1 2021, transaction revenues grew additional by about 340% year-over-year to $420 million. The income surge comes as extra retail traders have been drawn to the inventory markets given the large bull run via the Covid-19 pandemic and extra not too long ago, the meme inventory buying and selling frenzy. For perspective, the variety of funded accounts on Robinhood grew from round 5.1 million on the finish of 2019 to about 12.5 million in 2020 and stood at an estimated 22.5 million as of the top of June 2021. The retail buying and selling frenzy has additionally meant that Robinhood is ready to higher monetize its customers. The typical income per consumer rose from $65.70 in 2019 to $108.90 in 2020 and to about $137 in Q1 2021, on an annualized foundation.
Though choices stay the most important driver of Robinhood’s transaction income (47% of gross sales), the cryptocurrency enterprise is the fastest-growing. In Q1 2021, crypto-related income soared by round 20x year-over-year to nearly $88 million. Other than the core transactions enterprise, Robinhood’s different segments have additionally been increasing, with internet curiosity income and different income collectively rising by nearly 3x in Q1 in comparison with final 12 months. That stated, Robinhood is definitely getting extra depending on its transaction revenues, which accounted for nearly 81% of gross sales over Q1, versus about 75% final 12 months.
What Are The Dangers?
Whereas Robinhood’s latest gross sales progress has been strong, there are near-term dangers. The inventory markets may very well be peaking, with the S&P 500 now up about 90% from the lows of March 2020. Furthermore, inflation is on the rise, and the U.S. Federal Reserve can also be taking a look at price hikes for 2023, a 12 months forward of preliminary expectations. A pointy market correction and even sideways motion may restrict curiosity in Robinhood’s platform, which largely caters to first-time traders. Individually, Robinhood’s bread-and-butter fee for order circulation enterprise mannequin can also be controversial, with critics arguing that it may successfully give retail traders a worse value on their trades. Final month, the SEC indicated that it was reviewing fee for order circulation, inflicting some hypothesis that the follow, which is already unlawful in international locations such because the U.Ok., may very well be banned within the U.S. as effectively. Whereas PFOF has roughly change into a normal follow for Robinhood’s rivals corresponding to Charles Schwab and E-Commerce, they’re much less depending on it as a income stream, given their bigger interest-related revenues and different companies.
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