Financial-services platform Robinhood Markets (HOOD -1.32%) has built its brand on the retail investor. Its simple user interface and commission-free trades made it an extremely popular brokerage among young users.
However, the stock's been a disappointment since its initial public offering (IPO), down more than 80% from its highs. Robinhood's engagement peaked at 21.3 million users in early 2021, but that's fallen since then. Was Robinhood just a fad? Or are there reasons to be optimistic about the company's future? Here is what investors need to know.
Could investors start coming back to the market?
It's common for people to get more interested in the stock market when things are going well and lose interest when stocks keep going down. The pandemic created a very friendly market for retail investors. Government stimulus and low-interest rates made many growth stocks surge in value from 2020 to early 2021, creating investment returns that often take a decade to achieve.
I've previously noted that Robinhood's user base makes it a cyclical stock, with ups and downs based on how the market is doing. The company's user base peaked at 21.3 million in early 2021, matching up well with the timing of when many growth stocks traded at their highest prices, and that's probably no coincidence.
But both the markets and Robinhood's active user count have declined since then; its 17.3 million users at the end of 2021's fourth quarter marked the second consecutive quarter that user numbers declined.
Since the quarter ended, these numbers don't factor in many of the headwinds of early 2022, including a continued slide in growth stocks, higher inflation, and geopolitical tensions in Europe. It would not surprise me to see these negative headlines keep retail investors away from the markets and Robinhood's active users decline again in the first quarter of 2022.
But investing is about looking forward, and one might begin wondering if all of this negativity is nearing its peak. Many growth stocks have started to rally from their lowest prices, and while I'm not trying to time the market, there seems to be a point where things have nowhere to go but up. Markets have historically gone through these periods of ups and downs. When the market begins recovering, Robinhood might see its user numbers do the same.
Expanding the business
Robinhood seems aware of the cyclical nature of its business and is potentially working on expanding its offerings to compensate for that. Bloomberg recently reported that Robinhood is working on rolling out retirement accounts on its platform, including traditional individual retirement accounts, Roth IRAs, and pensions.
This is potentially a huge step for Robinhood for several reasons. First, retirement accounts are often a person's nest egg -- where they keep most of their money. This could dramatically increase the amount of capital on Robinhood's platform, which stood at $98 billion at the end of 2021. Industry peer Fidelity has trillions of dollars on its platform, and retirement accounts play a big part in that.
Second, retirement accounts emphasize long-term investing. There are often fees and taxes involved in withdrawing money from these accounts, and the typical approach for retirement accounts is to keep it "out of sight, and out of mind." Unless people are trading their nest eggs, which is unlikely, having retirement accounts could make Robinhood's engagement more consistent and smooth out some of the ups and downs that investors see right now in its user activity.
A contrarian play
The best time to buy any cyclical business is when things aren't going well. Sure, oil investors were probably scared in late 2020 when oil was less than $20 per barrel and shares of ExxonMobil traded at $34. However, they will likely have better long-term returns than someone who recently bought at $80 after oil rebounded to more than $100.
I think the same logic can apply to Robinhood; the stock is down more than 80% from its highest price. Yes, the engagement numbers are getting worse. Still, if you believe that Robinhood is here to stay, then it makes sense to expect these numbers to improve as the markets recover and retail investors return to their investment accounts. But by then, Robinhood's stock may be valued higher than it is today. In other words, the sky is falling at Robinhood, which might make it a good time to consider buying shares.