Robinhood Markets (HOOD 7.03%) took investors on a wild ride after its IPO last July. The online brokerage went public at $38 per share, and it hit an all-time high of $70.39 the following month.
But today Robinhood only trades at about $15 per share. The company also remains a divisive stock for the bears, who believe its business model is broken, and the bulls, who still believe in its disruptive growth potential.
Why the bears hate Robinhood
The bears will point out that Robinhood's growth is decelerating, that its core business faces regulatory headwinds, that it relies too heavily on volatile crypto and options trades, and that it's drowning in red ink.
Robinhood's revenue surged 245% to $959 million in 2020 as retail investors bought more stocks, options, and cryptocurrencies during the pandemic. The stimulus checks amplified that growth.
Its revenue grew another 89% to $1.82 billion in 2021. Its monthly active users (MAUs) rose 48% year over year to 17.3 million in the fourth quarter, but that represented an 8% decline from the third quarter. Its average revenue per user (ARPU) also fell 39% year over year and 1.5% sequentially during the fourth quarter, which suggests its near-term growth has peaked.
Robinhood expects its revenue to decline at least 35% year over year in the first quarter, and analysts expect its revenue to rise just 1% for the full year. That deceleration can be attributed to a lack of new stimulus checks, a burnout in meme stocks and speculative cryptocurrencies, and softer demand for options and cryptocurrencies -- which together accounted for 82% of its transaction-based revenue last quarter.
That high ratio suggests Robinhood's investors are still drawn toward riskier investments -- even though its accounts only have an average value of about $4,300. By comparison, Morgan Stanley's (MS -0.95%) E*Trade has an average account value of over $100,000.
Robinhood's use of payments for order flows (PFOF), which subsidizes its commission-free trades and accounts for most of its transaction-based revenue, could also be closely scrutinized by regulators. If regulators ban PFOF-backed trades in the U.S., Robinhood would need to start charging commissions -- which would more than likely alienate its core customers.
Lastly, Robinhood posted a net loss of $3.69 billion in 2021, compared to a slim net profit of $7 million in 2020. Most of that net loss came from stock-based compensation expenses related to its IPO, but analysts still expect the company to post a net loss of $1.18 billion in 2022.
Why the bulls still believe in Robinhood
The bulls believe Robinhood will overcome its growing pains, remain popular among younger investors, and expand its fintech ecosystem.
The company's new cash card, which is linked to its Cash Management feature, gives Robinhood a foothold in in-store and peer-to-peer payments. Robinhood has also been testing out a cryptocurrency wallet with a limited group of customers.
Integrating those wallets into its other payment features could help Robinhood challenge Block's (SQ 4.79%) Cash App and PayPal Holdings (PYPL 2.78%) in the digital payments market and make it a more diversified fintech platform.
Robinhood will also launch a securities lending feature, which will allow its customers to lend out their stocks for interest, in the near future. This new feature could generate extra interest income for both Robinhood and its customers while increasing the stickiness of its trading platform.
It also recently expanded its extended trading hours from 7 a.m. to 8 p.m. ET to match the trading schedules at E*Trade, Fidelity, and other brokerages. This upgrade -- which Robinhood calls a step "toward 24/7 investing" -- could complement its other new features and keep users locked into its ecosystem.
Robinhood's MAU growth stalled out in the fourth quarter of 2021, but the bulls will point out that its net cumulative funded accounts and assets under custody (AUC) both grew sequentially. Therefore, its platform is still growing, even if its customers are taking a breather and placing fewer trades.
Lastly, Robinhood's stock looks reasonably valued at less than seven times this year's sales. Granted, analysts expect the company to generate anemic growth this year, but they still expect its revenue to rise 38% next year with a narrower loss after it laps those difficult year-over-year comparisons.
Which argument should you believe?
Robinhood won't fade away anytime soon, but I think its weaknesses still overshadow its strengths. Unless it can generate stable MAU growth, reduce its dependence on cryptocurrencies and options, and stabilize its losses, I think its shares will slide lower in this challenging market.