Known for pioneering commission-free trades, Robinhood Markets, Inc. (HOOD) had an IPO in 2021, on July 29. At the time, the company had been making several advances in the cryptocurrency space and in November 2021, HOOD announced that more than 1.6 million people are on the waitlist for its cryptocurrency wallet. Also, it is currently working on a feature that will let users send cryptocurrency to other users as a gift. 

However, even with the advances in the crypto space, the stock has lost 37.5% over the past month.  HOOD is currently trading 80% below its 52-week high of $85, which it hit on August 4, 2021. 

Some of the stock’s dramatic plunge may be due to the data security incident that occurred on November 3, 2021, HOOD announced that 7 million customers were exposed, with email addresses accessed for 5 million of them, and several users’ phone numbers were also exposed. In addition, HOOD said on October 26 that seasonal headwinds and lower retail trading activity might also persist in the fourth quarter. So, its near-term prospects do not seem very promising.

Here are the factors that could shape HOOD’s performance in the upcoming months:

Ongoing Investigation

Several law firms have launched investigations against HOOD on potential violations of the federal securities laws, including omissions and fraudulent misrepresentations relating to the company’s business, operations, and prospects. For example, it is alleged that its revenue growth was experiencing a significant reversal, with transaction-based revenues from cryptocurrency trading serving only as a short-term, transitory injection, masking the actual reason for stagnating growth.

Unimpressive Financials

HOOD’s total revenues decreased 35.4% sequentially to $364.92 million for the fiscal third quarter ended September 30, 2021. The company’s average revenues per user (ARPU) fell 36% year-over-year to $65. Crypto activity declined from record highs in the prior quarter, leading to considerably fewer new funded accounts.

Its total operating expenses came in at $1.71 billion, up 509% year-over-year. Its net loss came in at $1.32 billion compared to $10.66 million in the prior-year quarter, while its loss per share came in at $2.06 compared to $0.05 in the year-ago period. Moreover, its non-GAAP EBITDA came in at a negative $84 million compared to an income of $59.11 million in the same period last year.

Poor Profitability

In terms of trailing-12-month asset turnover ratio, HOOD’s 0.13% is 38.5% lower than the industry average of 0.21%. Likewise, its negative trailing-12-month net income margin compares to the industry average of 30.08%. Also, its trailing-12-month ROTA is negative compared to the industry average of 1.36%.

POWR Ratings Reflect Bleak Outlook

HOOD has an overall rating of F, which equates to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. HOOD has a D grade for Value, consistent with its forward P/S of 8.24x, 143.2% higher than the industry average of 3.39x.

The stock has an F grade for Growth and Sentiment. This is in sync with analysts’ expectations that its EPS will remain negative in fiscal 2021 and 2022.

HOOD is ranked #168 out of 169 stocks in the Software – Application industry. In addition to the POWR Rating grades I’ve just highlighted, we’ve also rated the stock for Stability, Quality, and Momentum. Get all the HOOD ratings here.

Bottom Line

While HOOD pioneered zero-commission trading, its competitors have been catching up. According to Barron’s report, its rivals, such as Blackstone Inc. (BX), The Charles Schwab Corporation (SCHW), and Interactive Brokers Group, Inc. (IBKR), are well-positioned to gain as it struggles. Also, analysts expect HOOD’s EPS to remain negative in the near term. So, the stock is best avoided now.

How Does Robinhood Markets (HOOD) Stack Up Against its Peers?

While HOOD has an overall POWR Rating of F, you could check out its A-rated industry peers: Commvault Systems, Inc. (CVLT), Open Text Corporation (OTEX), and Progress Software Corporation (PRGS).

HOOD shares were trading at $17.07 per share on Wednesday afternoon, down $0.38 (-2.18%). Year-to-date, HOOD has declined -50.98%, versus a 29.45% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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