Robinhood (HOOD 1.34%) has burned many who invested in it since its IPO in July. The online brokerage went public at $38 per share, but it now trades nearly 60% below that price.
The bulls lost faith in the company amid concerns about its slowing growth, ongoing losses, and tighter regulations on the "payment for order flow" model that subsidizes its commission-free trades. The dismal fourth-quarter (period ended Dec. 31, 2021) report it delivered in January also seemingly indicated that its high-growth days were over.
Robinhood still faces an uphill battle this year, but three potential catalysts for growth have recently appeared on the horizon. Will any of them generate fresh interest in its beaten-down shares?
1. A new stock-lending program
Stock-lending programs allow investors to generate interest income by lending out their fully owned shares to financial institutions. Investors can still sell those shares. Volatile stocks -- like the "meme stocks" that are frequently traded on Robinhood -- usually net higher interest payments than stable blue-chip stocks.
This could benefit both Robinhood and its customers: The company generates interest income by lending out its customers' shares to other institutions, while its customers keep a cut of that interest.
Robinhood reported net interest revenues of $257 million for 2021, this was a 45% increase over the prior year. Investors shouldn't be surprised to see that number grow in the future as it expands its stock-lending program. The program could also increase the overall stickiness of its ecosystem.
2. Rolling out a new cash card (with rewards)
Robinhood also recently launched a debit card linked to its Cash Management platform with unique rewards. For example, users who round up their purchases to the next dollar can automatically invest the spare change into stocks, ETFs, or cryptocurrencies on the trading platform. It rewards those round-up users with random weekly bonuses that are capped at $10. It will also offer users exclusive discounts for retail partners in the near future.
Customers can also set up direct deposits for their paychecks and split the money automatically between their cash and investment accounts. There are no subscription, ATM, or overdraft fees -- so the service could gain momentum as a compelling alternative to traditional bank accounts.
This new debit card and cash management features might enable Robinhood to leverage the strength of its core brokerage app -- which served 17.3 million monthly active users (MAUs) at the end of 2021 -- to challenge Block's (SQ -0.20%) Cash App and PayPal (PYPL 0.48%) in digital payments.
3. More extended-hours trading
Lastly, Robinhood recently expanded its trading day by four hours. Its customers can now place trades from 7 a.m. to 8 p.m. ET, compared to its previous schedule of 9 a.m. to 6 p.m. ET.
That finally matches the extended-hours schedules of E*Trade, Fidelity, and Schwab. Keeping the platform open longer every day is likely to induce Robinhood's customers to place more trades. As a company that generated $1.4 billion in transaction-based revenue during the year, more trades would presumably lead to more revenue. Investors will need to monitor if the additional hours actually yield significant rewards for the company.
Will any of these catalysts move the needle?
Robinhood's latest moves indicate that it wants to lock in its customers, boost its engagement rates, and expand its ecosystem. But they don't fully address its biggest shortcomings.
The company still relied on volatile options and cryptocurrency trades for 82% of its transaction-based revenues last quarter, and it expects its near-term revenue to decline compared to last year -- when the meme stock frenzy was in full swing. Its bottom line also remains weighed down by high stock-based compensation (SBC) expenses (87% of its revenues in 2021), a $2 billion increase to the value of the convertible notes it issued during the Reddit-fueled short squeeze last year, and rising investments in its ecosystem.
It plans to reduce its SBC expenses by 35% to 40% in 2022, but analysts still expect it to remain deeply unprofitable for at least the next three years. That sea of red ink could overshadow the expansion of its platform.
For now, investors should watch to find out if Robinhood's latest initiatives boost its MAUs -- which declined sequentially last quarter. They should also look for evidence that it can successfully make progress in the crowded digital payments market against Block, PayPal, and other fintech platforms.
If it succeeds on both those fronts, investors might warm up to Robinhood stock again. But for now, it still doesn't look like a screaming buy at nearly seven times this year's forecast sales.