Financial technology company Robinhood Markets, Inc. (HOOD) is struggling with mounting losses, a declining active user base, and increasing regulatory pressures. Shares of HOOD have slumped 14.9% over the past year to close the last trading session at $9.72. The stock is currently trading 41.1% below its 52-week high of $16.49, which it hit on March 29, 2022.

Given its deteriorating fundamentals and a challenging macroeconomic environment, this popular software stock may continue to plunge this year. In this article, I have discussed several reasons why I am extremely bearish on this stock.

For the fourth quarter of fiscal 2022, HOOD’s transaction-based revenues declined 30% year-over-year to $186 million. The company also reported a net loss and net loss per share attributable to common stockholders of $166 million and $0.19, respectively.

HOOD’s Monthly Active Users (MAU) declined 0.8 million sequentially to 11.4 million as customers continued to navigate the volatile market environment. Also, its Assets Under Custody (AUC) decreased 4% sequentially to $62 billion, mainly driven by lower market valuations for growth stocks and crypto assets.

In addition to disappointing financials, increasing regulatory issues raise concerns about the company’s prospects. HOOD recently revealed that it is facing an investigation by the U.S. Securities and Exchange Commission (SEC) over its cryptocurrency business. The SEC’s probe came amid a regulatory crackdown after crypto exchange FTX filed for bankruptcy.

Moreover, HOOD’s crypto business has been under severe scrutiny for quite some time and has been fined a total of $135 million by regulators over the past two years.

Here is what could shape HOOD’s performance in the upcoming months:

Bleak Financials

For the fourth quarter that ended December 31, 2022, HOOD’s transaction-based revenues decreased 41.9% year-over-year to $186 million, while its other revenues declined 25% year-over-year to $27 million. Its loss before income taxes stood at $168 million for the fourth quarter. Also, the company reported a net loss of $166 million and $0.19 per share, respectively.

In addition, as of December 31, 2022, the company’s total liabilities came in at $16.38 million, compared to $12.48 million as of December 31, 2021.

Mixed Analyst Estimates

Analysts expect HOOD’s revenue for the first quarter (ending March 2023) to come in at $423.61 million, indicating an increase of 41.7% year-over-year. However, the company is expected to report a loss per share of $0.37 for the ongoing quarter. Furthermore, analysts expect the company to report a loss per share of $0.50 and $0.11 for fiscal 2023 and 2024, respectively.

Stretched Valuation

In terms of forward Price/Sales, HOOD is currently trading at 4.80x, 90.5% higher than the industry average of 2.52x. Likewise, the stock’s forward Price/Book multiple of 1.25 is 11% higher than the industry average of 1.12. In addition, its forward Price/Cash Flow of 15.68x is 65.8% higher than the 9.46x industry average.

Poor Profitability

HOOD’s trailing-12-month net income margin of negative 75.70% compares to the industry average of 27.19%. And its trailing-12-month ROCE and ROTA of negative 14.43% and 4.41% are significantly lower than the industry averages of 11.19% and 1.15%, respectively. Moreover, the stock’s trailing-12-month asset turnover ratio of 0.06x is 66.6% lower than the industry average of 0.19x.

POWR Ratings Reflect Bleak Prospects

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 an F grade for Sentiment, consistent with its weak financials and mixed analyst estimates. Also, it has a D grade for Quality and Value, in sync with its poor profitability and stretched valuation.

In addition, the stock’s 24-month beta of 1.55 justifies the Stability grade of D.

HOOD is ranked #122 of 136 stocks in the D-rated Software-Application industry. 

Beyond what I have stated above, we have also given HOOD grades for Growth and Momentum. Get all HOOD’s POWR Ratings here.

Bottom Line

Financial technology company HOOD reported disappointing financial results for the fourth quarter and full-year 2022. Furthermore, the company’s near-term prospects look bleak as it grapples with a shrinking active user base, mounting losses, and regulatory pressures. Given its weak financials, bleak growth prospects, low profitability, and high valuation, we think this popular financial software stock could be best avoided this year.

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

The odds of HOOD outperforming in the weeks and months ahead are greatly compromised. However, there are many industry peers with impressive POWR Ratings. Thus, consider these three stocks which are A-rated (Strong Buy):

Commvault Systems, Inc. (CVLT)

Progress Software Corporation (PRGS)

Xperi Inc (XPER)

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HOOD shares were trading at $9.71 per share on Tuesday morning, down $0.01 (-0.10%). Year-to-date, HOOD has gained 19.29%, versus a 5.73% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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