In the second quarter of the year, the online commission-free brokerage Robinhood Markets (HOOD 3.37%) saw its assets under custody (AUC) fall from $93 billion to $64 billion, a decline of roughly 31%. It's the largest quarterly decline Robinhood has experienced in two years. Lots of high-growth tech stocks and cryptocurrencies experienced a huge sell-off in the second quarter, contributing heavily to this drop in AUC at Robinhood.
The company's business has floundered for several quarters now, as the bear market has been brutal for its operations. Is it time to dump the stock?
Robinhood is trying to improve its operations
While AUC is down significantly, a lot of this is beyond Robinhood's control because the value of those assets is tied to equity and crypto valuations. AUC will also likely bounce back when asset prices do, and Robinhood's CFO Jason Warnick said on the company's second-quarter earnings call that AUC had jumped back above $70 billion due to the rally in July.
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Even so, Robinhood is still struggling from an operational standpoint. In Q2, the company generated a loss of $295 million, although that is down from a net loss of $392 million in the first quarter. Revenue of $318 million rose from $299 million in the first quarter but is down from $565 million in the second quarter of 2021.
Management's goal is to have positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by the end of the year. In the second quarter, Robinhood generated an adjusted EBITDA loss of $80 million, which is the best it's done in four quarters. Robinhood also announced recently that it plans to trim more than a fifth of its workforce.
Warnick is now guiding for expenses to come in between $1.7 billion and $1.76 billion for the year not including stock-based compensation. That would represent a slowdown in expenses in the back half of the year and would also represent a 7% to 10% decline from 2021. Furthermore, that number includes $45 million to $60 million of costs this year related to the recent layoffs.
On the revenue front, Robinhood will benefit from rising interest rates because its interest-earning assets will yield more. Warnick estimates that for each 0.25% of interest rate hikes by the Federal Reserve, the company will realize $40 million of additional revenue on an annual basis.
Robinhood is executing on the product road map
Robinhood pioneered the concept of brokerages offering wide-scale commission-free trading, but that doesn't mean it's the only one or that it does it the best (the decline in its stock price this year offers some proof of that). Many brokerages have adopted the practice in order to compete, and now Robinhood needs to find other ways to maintain and grow its user base, while also monetizing these users.
Management is aware of the issue and is rolling out new products and services to achieve this. For instance, the company now has extended trading hours and continues to offer more assets for investors to buy, whether it's over-the-counter stocks or more cryptocurrencies.
Robinhood has also launched securities lending as a way for users to make passive income from their holdings, and more than $3 billion of equities have already been enrolled in the program. Additionally, Robinhood lets users trade on margin, which is effectively a way of letting users borrow against their stock holdings, and the company is earning 5% interest on the margin. Robinhood also has a Cash Card, which it can make interchange fees on.
The big product I am excited to see the company roll out, however, is a retirement account option, which is slated for a full release later this year and will allow users to have multiple brokerage accounts with the company.
These retirement accounts have the potential to meaningfully grow deposit balances, and Robinhood is uniquely positioned to grow this product because of how many first-time investors come to the platform. The company also offers a sleek digital user experience that makes it easier to use and understand than other brokerages. If it can replicate this with its retirement account option, it could be huge and create a very sticky relationship with the customer.
Buy or sell Robinhood stock?
Robinhood undoubtedly has a lot of work to do from an operational standpoint in order to achieve positive adjusted EBITDA by the end of the year, especially since there could be more pain ahead in the market. Robinhood also has to prove that all of these new products can grow revenue and make better relationships with users.
I don't think it's a guarantee. But the company is navigating through the bear market, which is tough on the business, and it has $2.5 billion of cash above what it needs to run the business. I would rate Robinhood as a hold -- and it is certainly a stock that I am watching.
