Robinhood, the stock-trading platform that popularized free trades, grew its user base from 1 million users to over 13 million in just four years. That explosive growth, which was largely supported by younger investors, forced older online brokerages to offer free trades.
Robinhood regularly updates its list of the 100 most popular stocks (by holdings) among traders on its platform, which predictably include big tech companies like Amazon, Microsoft, and Google parent Alphabet. However, that list also includes a lot of weaker tech stocks with limited growth potential.
Four of the stocks on that list caught my eye: GoPro (GPRO 0.28%), Fitbit (FIT), Lyft (LYFT 1.80%), and Uber (UBER 2.06%). Do the popularity of these stocks on Robinhood highlight potential turnaround plays? Or are too many investors simply chasing hot names and headlines instead of doing their due diligence?
GoPro and Fitbit
GoPro and Fitbit sell different types of products, but both of their stocks trade far below their IPO prices for similar reasons. Both companies enjoyed first-movers' advantages in the action camera and fitness tracker markets, but their sales decelerated due to long upgrade cycles and competition from cheaper or more capable devices.
GoPro struggled to expand beyond its core market of outdoor enthusiasts and failed to pull mainstream users away from increasingly powerful smartphone cameras. Fitbit lost the low-end market to cheaper competitors like Xiaomi and ceded the high-end market to premium smartwatch makers like Apple.
GoPro's stock admittedly looks cheap at less than one time this year's revenue. Unfortunately, its fundamentals are a mess: Its revenue plunged 53% annually in the first half of 2020, and its net loss more than tripled. Its growth might stabilize after the COVID-19 crisis ends, but its gains will ultimately be capped by its long upgrade cycles and limited market appeal.
Google agreed to acquire Fitbit last year for $7.35 per share. That deal might have convinced some investors to buy Fitbit as an arbitrage play, since the stock is trading just above $6. Unfortunately, that deal is now being closely scrutinized by U.S. and EU regulators -- and the death of that deal could easily crush Fitbit's stock.
Without Google, Fitbit would be in serious trouble: Its revenue fell 23% annually in the first half of 2020 and it remained deeply unprofitable. Fitbit's share of the wearables market also fell from 7.8% in 2018 to 4.7% in 2019, according to market research company International Data Corp. Fitbit's stock trades at just over one time this year's sales, but it's cheap for obvious reasons.
Lyft and Uber
Ride-hailing kings Lyft and Uber also trade far below their IPO prices. Neither company is profitable, and both businesses have struggled as more people stay home throughout the COVID-19 crisis.
Lyft's revenue declined 21% year over year in the first half of 2020, and Uber's revenue dropped 8% during the same period. Uber benefited from the growth of Uber Eats throughout the pandemic, but the delivery unit's losses -- along with its unprofitable freight business and investments in driverless cars -- wiped out the ride-hailing unit's slim profits.
Some investors might believe Lyft and Uber will recover after the pandemic ends. Their revenues should rebound, but their long-term prospects still look dim.
First and foremost, Lyft and Uber both face demands for benefits and higher wages for their drivers. Last year, California passed a law that demanded companies to reclassify their "gig workers" as employees so they can receive benefits and unionize. Lyft and Uber are threatening to leave California over that new law, but other states could still pass similar laws. Democrats, including presidential candidate and presumptive nominee Joe Biden, also support the expansion of California's gig law on a nationwide scale.
Lyft and Uber believe autonomous vehicles can solve those problems and guide them toward profitability by eliminating human labor costs -- but that far-fetched solution requires the nascent driverless market to expand at a much faster rate.
Lyft's stock trades at about three times this year's sales, while Uber trades at about four times sales. Neither stock is expensive, but the risks simply outweigh the rewards -- especially when there are plenty of more promising (and profitable) growth stocks to choose from.
The key takeaways
I'm not saying Robinhood investors who buy shares of GoPro, Fitbit, Lyft, and Uber are reckless or wrong. However, they should remember that hot brands don't necessarily make for the best investments. There might be some value left in these four beaten-down stocks, but they're all trading below their IPO prices for clear reasons -- so investors should do their homework before hitting the buy button.