Robinhood Markets’ (HOOD) Shares Make A Small Comeback Despite A Disappointing Q4 Earnings Report
2:52 pm Friday, January 28th, 2022
Robinhood Markets’ (NASDAQ:HOOD) shares appear to be rebounding after initially falling significantly after the company posted another disappointing quarter. The stock is still down about 70% from its IPO and opening price of $38 per share, however.
Markets have also been broadly losing momentum — the S&P 500 has given up about 10% on the year — which has disadvantaged the trading platform even further. Because HOOD derives most of its revenue from transaction volume via payment for order flow (PFOF), it relies on having a growing base of monthly active users (MAUs) willing to transact numerous times each month. When markets begin to sour, not only does a high multiple stock like HOOD, which trades at ~5x FY22 sales, get swept up in the sell-off, it also begins to see users buy and sell less frequently, causing sales to drop off.
This one-two punch was in full tilt in Q4, as HOOD missed on revenue estimates for the second-straight quarter by growing revenues just 14.2% yr/yr to $362.7 mln. HOOD’s sales did top its quarterly guidance of $325 mln, but that was overshadowed significantly by the company posting its second straight quarter of declining growth sequentially.
Furthermore, MAUs also tumbled sequentially for the second quarter in a row in Q4 to 17.3 mln. MAUs have now declined nearly 19% from Q2. Additionally, average revenue per user (ARPU) continued to sink sequentially in Q4 to $64 from $65 last quarter and $112 in Q2. This poor combination that has gone on for two periods is one of the primary drivers behind HOOD’s continually crashing stock price.
Another reason for the drop is the company’s lackluster guidance. HOOD expects Q1 revs of at least $340 mln, well below estimates. HOOD’s sales guidance also translates to a decline of 35% yr/yr and another sequential drop.
Although not much in Q4 stood out in a positive way, HOOD is operating in a market environment that is plaguing other trading platforms as well. For example, Interactive Brokers (IBKR), which also benefits when trading activity is heightened, missed revenue estimates in Q4 and Q3 even as total daily average revenue trades (DARTs) jumped 8% sequentially. With interest rates most likely to go up this year, traders may shift away from equities and toward less risky assets reaching higher yields. However, this could serve as a short-term headwind for HOOD, especially since the raised interest rates would still be close to zero.
Furthermore, HOOD is constantly improving its trading platform, adding new features. Some notable additions likely to launch this year include extended trading hours, tax-advantaged retirement accounts, and a fully paid securities lending program. Additionally, HOOD is also focused on increasing its cryptocurrency offerings. Not only has it begun public beta testing for crypto wallets, but it is also engaged with regulators on adding more coins for trading. Although the current market sell-off is eclipsing the incremental gains those features may bring, we think the new elements should help spur customer growth over the long term.
Bottom line, HOOD’s weak stock performance could be chalked up to poor timing for its IPO, coming less than a year ahead of the Federal Reserve tightened its stance on easy money. Despite the stock making a nice comeback from its dismal start to the day, we think it is best to remain on the sidelines due to the uncertainty surrounding how markets will continue to react to rising interest rates, as HOOD’s stock still has room to dip further given its valuation of ~5x FY22 sales and downside guidance.
