Since going public last year, the popular online retail brokerage Robinhood (HOOD -1.55%) has been volatile, at one point rising to $55 per share before crashing down to roughly $13.30 per share now and a roughly $11.5 billion market cap. As the pioneer of commission-free online stock trading, Robinhood has accumulated a big audience but faces challenges in staving off competition, maintaining its large user base, and eventually reaching profitability. Recently, the company has had some nice wins. Let's review each and see why it is important to the stock.
1. After-hours trading
Recently, Robinhood announced that it would be extending its trading hours from normal market hours to between 7 a.m. to 8 p.m., enabling investors to put in trades in pre-market hours or after the market closes. Robinhood called the move an important step toward 24/7 investing. Offering pre-market and after-hours trading is common at most large brokerages such as Fidelity and Charles Schwab.
Robinhood attributed its decision to feedback from customers, who say they are too busy working during regular market hours. Robinhood also said it has a community of "early birds" and "night owls" only logging in outside of normal trading market hours. The news sent the stock rocketing 25% higher on the day of the announcement.
This is a good move for the fintech stock because Robinhood makes its money through payment for order flow, in which it sources the trade orders to market makers that actually execute the trades. Robinhood makes fees for each order, so the more orders, the more revenue for the company, and extended hours create more opportunity for increased order flow.
2. Big win in the courts
At the end of 2020, during a time when retail trading had really grown in popularity due to the pandemic, Massachusetts' Secretary of the Commonwealth, William Galvin, sued Robinhood for using "aggressive tactics to attract inexperienced investors." Primarily, Galvin complained that the gamification aspects of Robinhood coerced investors into trades that were not in their best interest. The complaint specifically involved Massachusetts' somewhat new fiduciary rule, which requires brokers to act in the best interests of their clients. Galvin also sought to revoke Robinhood's broker-dealer license in the state.
Recently, however, Boston Superior Court Judge Michael Ricciuti ruled that part of the Massachusetts fiduciary rule is not applicable, largely because it conflicts with other state securities laws as well as federal law. Galvin's suit has made national headlines and might be being watched by other states. As the pioneer of commission-free trading, Robinhood has already come under intense scrutiny from regulators. Galvin's case is not necessarily dead, but Ricciuti's recent ruling is a big blow.
3. The Schwab for younger investors?
Analysts at Morgan Stanley recently initiated coverage on Robinhood with an equal-weight rating and a $15 per share price target, which doesn't imply a ton of upside from Robinhood's current share price of roughly $13.60. But Morgan Stanley also said it thinks Robinhood has the potential to be the Charles Schwab for millennial and Generation Z investors, which is quite a nice compliment.
I, too, see the potential and have liked management's vision to offer more products including crypto wallets, more cryptocurrencies for sale, more educational content for new investors, and individual retirement accounts, among other products. I could one day see Robinhood as a place where consumers conduct all of their investing activities. Having had multiple brokerages including a Robinhood account, I do think the app provides a very good front-end experience and is the easiest to use.
However, there is a lot of work to do before Robinhood reaches this point -- including getting through the rising-rate environment, which may slow user growth and trading activity, and maintaining its large customer base, which showed signs of weakening in its last earnings report. I like management's vision and the community they have built so far, but still think there is a lot left to prove.