There wasn't a ton to like in the recent fourth-quarter earnings report from Robinhood Markets (HOOD -0.95%). The online commission-free brokerage posted a loss of $0.49 per share on total revenue of nearly $363 million. Earnings per share missed analyst estimates, and revenue for the final three months of the year came in flat.
Even worse, management guided for revenue in the first quarter of this year to come in at less than $340 million, which is more than $100 million less than Wall Street analysts had been expecting. After pricing its initial public offering at $38 per share in July of 2021, the stock is down about 60%. Is it time to give up on Robinhood?
Trending downward
During the end of 2020 and the first half of 2021, Robinhood took advantage of favorable trading conditions, a swarm of retail investors that entered the market, and the boom in meme stocks and cryptocurrencies. New accounts, monthly active users, and assets under custody surged at the company.
Image source: Getty Images.
But things have normalized since. In the fourth quarter of 2021, net cumulative funded accounts came in flat from the prior quarter, assets under custody are only up slightly, and monthly active users fell from nearly 19.3 million to 17.3 million.
Still, all of these numbers are up significantly since the end of 2020. And you figure that things had to normalize at some point as consumer saving rates start to settle down and as some of the abnormal market activities like meme-stock trading and crypto trading slow as well. Robinhood makes the bulk of its revenue from options trading, and it seems that some of the speculative behavior during earlier days of the pandemic has settled down as the Fed has tightened monetary policy and markets have come tumbling downward.
But investors are also worried about guidance. The $340 million of projected revenue in the first quarter would represent the worst quarter Robinhood has had since the fourth quarter of 2020. Chief financial officer Jason Warnick said customers have been making fewer and smaller trades since 2022 began, but are still putting money into their accounts. Warnick said that in the days leading up to the earnings call on Jan. 27, the company did experience higher volume but that it was too early to tell if it indicated some upward trend.
So, what's the plan?
Clearly, relying on revenue from meme-stock trading is not sustainable, and it seems like management has a bigger vision. Robinhood still has some very solid engagement, with nearly 23 million funded accounts, and over the last year has been working to improve its products. The company has made it easier for customers to transfer money into Robinhood, and CEO Vlad Tenev said the company will soon be introducing instant debit deposits and withdrawals, which I think will make it more attractive for customers to deposit funds.
Robinhood is also building on its most profitable product, options trading, by adding new features like options alerts; an options watch list; and the ability to roll options, which allows users to extend the expiration date of an option before it expires.
I use Robinhood as one of my brokerages and do find some of these features create a better experience. Crypto has also become a big portion of revenue, and based on management's comments, it seems like customers are champing at the bit for Robinhood to add more tokens to the platform (it currently has only seven).
There seem to be regulatory issues potentially slowing further crypto expansion, although Tenev said there is nothing explicitly stopping Robinhood from offering new tokens on the platform and that the company plans to add more. Robinhood also recently launched a public beta of its crypto wallet.
The other thing that I think could be exciting and bring larger sums of deposits and make the platform stickier for customers is if Robinhood can launch retirement accounts, which the company is planning to roll out in the middle of the year, according to Tenev.
Lastly, Robinhood seems to be making efforts to provide more educational content and support to customers, which I think has been an issue since the whole debacle with GameStop's violent stock price moves and suspension of trading on the Robinhood site went down. The company has built up a whopping $6.3 billion of cash, which Warnick said is 20 times above the required capital it typically has to post for its clearing brokers. The goal is to ensure the company can handle any kind of intense volume during peak trading periods.
Robinhood also now has 24/7 phone support and says it is studying opportunities to engage with customers at the very beginning of their investing lives. Tenev said it wants to help this market manage daily spending habits. The goal would be to help customers build savings and learn about investing. Then, when members of this segment of the market are ready to invest, Robinhood would be in a strong spot to become their brokerage.
I think the educational and trust piece is important for Robinhood's relationship with its regulators to show that the company is not incentivizing or gamifying risky behavior -- and it's important for customers themselves. Imagine if you could come to Robinhood, use the site for daily budgeting and cash management, as well as investing and for your retirement account. Robinhood already has an excellent user interface, so giving customers one platform for all of their cash management and investing needs could be a powerful proposition.
Give up or go in?
I really don't hate Robinhood's long-term vision, and the company now trades at a more-reasonable seven times projected 2022 revenue.
Still, the numbers and guidance are not favorable, and I also wonder how trading will be affected as interest rates rise, savings rates fall, and if the Fed shrinks its balance sheet and removes liquidity from the market. While I like a lot of what Tenev is talking about, I don't have a clear line of sight right now as to whether Robinhood's strategy will succeed.
I'm not completely out on the stock, but I still see it as more of a show-me story. I'll be monitoring it for sure.
