Is Robinhood Markets Stock a Buy Now?

Share prices of Robinhood Markets (HOOD 3.08%) plunged to an all-time low after the online brokerage posted its fourth-quarter report on Jan. 27.

Its revenue rose 14% year over year to $363 million, which missed analysts' estimates by about $15 million. It posted a net loss of $423 million, compared to a net profit of $13 million a year ago, and its loss of $0.49 per share missed analysts' expectations by a nickel.

For the first quarter, Robinhood expects its revenue to decline by at least 35% year over year to less than $340 million. It's blaming that drop on a tough comparison against its "outsized revenue performance" from heightened trades in "certain meme stocks" in the prior-year quarter. Analysts had expected Robinhood to generate $378 million in revenue.

Image source: Getty Images.

Those headline numbers were ugly, but some contrarian investors might be wondering if Robinhood's stock has finally bottomed out. It now trades more than 70% below its initial public offering (IPO) price and at about five times its trailing sales. Competitor Charles Schwab (SCHW 1.00%), which grew at a slower rate than Robinhood over the past year, trades at nine times trailing sales.

Pay attention to Robinhood's sequential growth

Robinhood's number of net cumulative funded accounts, monthly active users (MAUs), and assets under custody (AUC) all grew by the high double digits on a year-over-year basis during the fourth quarter. But if we look at its growth on a sequential basis, its slowdown becomes painfully apparent:

Source: Robinhood.

On the bright side, its number of net cumulative funded accounts and AUC grew again after dipping sequentially in the third quarter. Unfortunately, that growth was anemic and throttled by its loss of MAUs.

Meanwhile, Robinhood's average revenue per user (ARPU) plunged 39% year over year and dipped 1.5% sequentially to just $64. It blamed that decline on lower trading volumes for equities and options (82% of its transaction-based revenue) and lower interest earnings from its securities lending programs.

Robust trading volumes for cryptocurrencies -- 18% of its transaction-based revenue -- partly offset that decline, but the continuation of the cryptocurrency market's crash throughout January (along with Robinhood's dismal guidance) suggests its crypto trades could also dry up in the first quarter.

Analysts expect Robinhood's revenue to rise 24% to $2.26 billion for the full year, but its downbeat guidance could cause those estimates to be reduced.

A volatile base of lower-value, higher-risk traders

The average size of a Robinhood account is only about $3,500, compared to $100,000 at Morgan Stanley's (MS 1.21%) E*Trade and $240,000 at Schwab. However, Robinhood's smaller retailer investors clearly like to place riskier bets on meme stocks, options, and cryptocurrencies:

Source: Robinhood. YOY = Year over year.

They briefly favored equities during the meme-stock pop in the first quarter of 2021, then drifted toward options and cryptocurrencies throughout the rest of the year in search of bigger gains. Unfortunately, that momentum is fading as rising inflation and interest rates spark a rotation out of riskier assets.

That deceleration reflects a gradual loss of interest from smaller retail investors as meme stocks and cryptocurrencies lose their luster.

Its losses aren't as ugly as they seem

For the full year, Robinhood generated $1.82 billion in revenue but posted a net loss of $3.69 billion, compared to a slim profit of $7 million in 2020.

However, most of that massive loss can be attributed to two expenses: its $1.57 billion in stock-based compensation, which was paid to its top executives when its stock hit certain share price targets after its IPO, and $2.05 billion in expenses related to the convertible notes it issued during the Reddit-fueled short squeeze last February to meet its capital requirements.

Excluding those two expenses and some other costs, it still posted a profit of $34 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the full year.

But for 2022, Robinhood only expects to reduce its stock-based compensation expenses by 35% to 40% year over year -- which implies those costs will still consume 38% to 45% of its projected revenue of $2.26 billion. It also expects its total operating expenses, excluding stock-based compensation, to rise 15% to 20% for the year as it focuses on improving its technologies for customer service, the cloud, web hosting, and fraud protection.

But despite all that spending, analysts still expect Robinhood to narrow its net loss to $443 million in 2022.

Is Robinhood a contrarian play?

Robinhood's slowing growth, lack of profits, and high debt-to-equity ratio of 1.7 all make it hazardous to own as interest rates rise. It also faces stiff competition from larger online brokerages and dedicated cryptocurrency exchanges, as well as unresolved regulatory challenges.

Simply put, there aren't any compelling reasons to buy Robinhood right now. It might eventually be a takeover target for a larger brokerage, but those suitors probably won't step up until its stock falls even further.