One of the most polarizing companies over the last couple of years has been Robinhood Markets (HOOD 0.54%). The millennial-focused trading app became a household name in early 2021 as it became a core component of the infamous meme-investing movement featuring GameStop and other highly shorted stocks.
Following Congressional testimony by Robinhood CEO Vlad Tenev in February 2021, the company (perhaps surprisingly) found a backer in technology investor Cathie Wood. Since its initial public offering (IPO) in July 2021, Wood has amassed nearly 30 million shares of Robinhood. More recently, the company published first-quarter 2022 results and experienced a sharp sell-off thereafter.
But despite that, Wood and her flagship ARK Invest funds have continued buying the stock. Let's dig into Robinhood's first-quarter results and analyze if now might be a good time to buy the dip.
What is the big picture?
At a glance, Robinhood's first-quarter results left much to be desired. The company reported lower revenue across its major product segments on a year-over-year basis, while growth in monthly active users stalled. For the quarter ended March 31, the total net revenue was $299 million, a decrease of 43% year over year.
The company's primary source of revenue is trading fees. Transaction-based revenue declined 48% in the first quarter, with trading in options, cryptocurrencies, and equities all experiencing sharp decreases. Moreover, the company finished the quarter with 15.9 million monthly active users, a 10% decline from the prior-year period.
While these results and key performance indicators might appear alarming, investors should keep in mind that the stock market has witnessed precipitous sell-offs across all major indexes so far in 2022, with the S&P 500 hovering near bear market territory as fears over inflation and economic growth linger.
And Robinhood is not the only brokerage experiencing disruptions due to volatile market activity. For example, industry leader Charles Schwab reported lower revenue year over year in its first quarter with client assets declining sequentially.
While the financial outlook for Robinhood is questionable, the stock is only down nearly 3% over the last month, with the largest decline occurring from May 4 through May 11. Since early May, though, the stock has experienced a sharp increase in buying from notable investors.
Image source: Getty Images.
What does institutional money think?
Over the last several weeks, the stock has been gobbled up by ARK Invest's Cathie Wood as well as cryptocurrency entrepreneur and FTX founder Sam Bankman-Fried.
Wood has consistently purchased shares in Robinhood since its IPO last summer. She initially bought roughly 4 million shares in July 2021 and steadily added to her position with notable buying activity during December 2021 and January 2022, when the stock began to sharply decline. While some might believe this is Wood's attempt to lower her cost basis in the stock, investors should look a bit closer at Robinhood's product roadmap and correlate that to Wood's initial thesis.
During an interview with CNBC several months ago, Wood said that the company's ongoing product development was of interest to her, particularly how Robinhood can parlay that with new and existing users.
During the company's earnings call, chief financial officer Jason Warnick highlighted several new products and features, including a debit card with rewards that cardholders can use to invest in stocks and crypto, as well as extended trading hours and stock lending.
Robinhood also made crypto wallets available to all customers in April and began trading in several new tokens including Polygon (MATIC +0.00%), Solana (SOL 0.64%), and Shiba Inu (SHIB +4.20%). Lastly, management talked about an integration with the Lightning Network, which will allow efficient Bitcoin (BTC +1.24%) transfers. The idea is that once the Lightning Network is fully integrated into the crypto product suite, Robinhood will be better positioned to handle Bitcoin transactions at a lower cost and on a global level.
Perhaps the company's progress on the crypto front sparked the interest of another institutional investor, Bankman-Fried, who acquired a 7.6% equity stake in Robinhood. Although Bankman-Fried's intentions are not yet fully clear, investors should be encouraged by the validation from a leading force in the crypto arena.
NASDAQ: HOOD
Key Data Points
Buy, sell, or hold?
While Robinhood's results look depressed, the company has made a number of important advances with its product roadmap. It is important to note, though, that you should not pour money into a stock simply because high-caliber investors do so. Despite Wood's track record and FTX's quick rise to crypto dominance, even the most notable investors are fallible.
With Robinhood trading near 52-week lows, perhaps the most prudent move is to assess future earnings reports. More importantly, keep an eye on the new products and services and how management translates these into higher revenue and profits.
