Robinhood Markets, Inc. (HOOD) is a financial services platform that allows users to invest in exchange-traded funds, stocks, options, cryptocurrencies, and other financial instruments. The company also offers personalized financial learning and education solutions, which include Robinhood Snacks, Robinhood Learn, Newsfeeds, Robinhood lists and alerts, and First Trade recommendations.

As the company offers commission-free trading services and is known for its easy-to-use, streamlined platform and appeal to investors new to the investment game, it gained immense popularity amid rampant speculation during pandemic lockdowns.

However, the post-pandemic inflation and consequent increase in interest rates by the Federal Reserve have taken the wind out of the sails and have since marked a reversal in fortunes for the platform.

Moreover, HOOD has also found itself in the crosshairs of the regulators amid their ongoing crypto crackdown. Recently, the company announced that it is being investigated for its trading execution, the latest in a string of regulatory and legal proceedings faced by the online brokerage.

Also, on June 9, HOOD announced the removal of three tokens, including Cardano, Polygon, and Solana, from its crypto trading platform, specifically citing the SEC’s actions as reasons for the delisting.

The financial services company reported solid second-quarter revenue as interest rates continued to buoy its interest income, achieving profitability for the first time as a public company. HOOD’s net interest revenue grew 243% year-over-year to $442 million in the second quarter, as its brokerage margin investing business benefited from the Fed’s monetary policy tightening campaign to fight high inflation.

Despite its profitable quarter, investors are concerned. Its transaction-based revenue decreased nearly 5% year-over-year during the second quarter.

Shares of HOOD have slumped 15.5% over the past month but have gained 8.1% over the past six months to close the last trading session at $10.89.

In view of the above, we take a deeper look at factors that could shape HOOD’s performance this month and beyond:

Mixed Financials

For the second quarter that ended June 30, 2023, HOOD’s net revenues increased 52.8% year-over-year to $486 million, while its adjusted EBITDA came in at $151 million, compared to an EBITDA loss of $80 million during the previous year quarter. As a result, HOOD’s net income for the quarter came in at $25 million, or $0.03 per share, compared to a net loss of $295 million and $0.34, respectively, a year ago.

While the recent performance beat estimates to mark the first profitable quarter in the company’s history, HOOD has been witnessing a decline in monthly active users to 10.80 million, down by 1 million sequentially and 3.2 million year-over-year. Consequently, the company’s transaction-based revenue for the quarter decreased 4.7% year-over-year to $202 million.

Poor Profitability

HOOD’s negative trailing-12-month net income margin of 49.58% compares unfavorably to the industry average of 25.77%. And its trailing-12-month ROCE and ROTA of negative 11.64% and negative 2.89% fall significantly short of the respective industry averages of 11.30% and 1.14%, respectively.

Mixed Analyst Estimates

Despite optimistic analyst estimates that project HOOD’s revenue and EPS to rise to $2.20 billion and $0.13 per share by fiscal 2025 (and a lot can change by then in a turbulent geopolitical and macroeconomic environment), the company is expected to report a loss of $0.51 per share for the current fiscal.

Stretched Valuation

HOOD’s forward P/E multiple of 27.02 is 193.8% higher than the industry average of 9.19. Moreover, in terms of forward Price/Sales, HOOD is currently trading at 5.31x, 129.4% higher than the industry average of 2.32x.

Likewise, the stock’s forward Price/Book multiple of 1.38 also exceeds the industry average of 1.01 by 36.7%.

POWR Ratings Reflect Weakness

HOOD has an overall D rating, translating to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. HOOD has D grades for Quality and Value, consistent with its lower profitability and higher valuation in relation to its peers.

In addition, with a 24-month beta of 1.55, the stock has a grade D for Stability.

HOOD is ranked #115 of 135 stocks in the D-rated Software – Application industry.

Beyond what has been stated above, additional ratings for HOOD’s Sentiment, Growth, and Momentum are available here.

Bottom Line

Given HOOD’s declining users, low profitability, stretched valuation, and persistent regulatory headwinds, it could be wise to avoid this stock for now.

Stocks to Consider Instead of Robinhood Markets, Inc. (HOOD)

The odds of HOOD outperforming in the weeks and months ahead are greatly compromised. However, these three A-rated (Strong Buy) stocks from the Software – Application could be better alternatives.

Commvault Systems, Inc. (CVLT)

IBEX Ltd. (IBEX)

eGain Corporation (EGAN)

For exploring more A and B-rated application software stocks, click here.

What To Do Next?

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HOOD shares were trading at $11.15 per share on Friday afternoon, up $0.26 (+2.39%). Year-to-date, HOOD has gained 36.98%, versus a 18.69% rise in the benchmark S&P 500 index during the same period.

About the Author: Santanu Roy

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities. More...

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