Is It Too Late to Buy Robinhood Stock?

Robinhood (HOOD 4.44%) practically became synonymous with retail investing during the buying frenzy in growth stocks, meme stocks, cryptocurrencies, and speculative options throughout 2020 and 2021. Its trading app drew in millions of new investors with its commission-free trades, gamified features, and streamlined interface.

Robinhood went public at $39 per share on July 29, 2021, then surged to its all-time high of $70.39 on Aug. 4. At its peak, Robinhood's enterprise value reached $61 billion -- a whopping 39 times the revenue it would actually generate in 2021.

Image source: Getty Images.

That sky-high valuation became unsustainable as revenue growth cooled off, the business racked up more losses, and rising interest rates drove investors toward more conservative investments. Robinhood was also criticized for its abrupt trading freezes for popular stocks; its controversial "payment for order flow" (PFOF) deal with its top investor, Citadel; its gamification of the investing process; and a technical glitch that led to the suicide of an inexperienced investor.

That's why Robinhood now trades at about $9 a share. But with an enterprise value of $11 billion, it still can't be considered a bargain at 6 times this year's sales. Is it too late to bet on this beaten-down stock's eventual recovery?

How ugly was Robinhood's slowdown?

At the end of 2021, Robinhood had 22.7 million net cumulative funded accounts, 17.3 million monthly active users (MAUs), and $98 billion in assets under custody (AUC). It generated $64 in average revenues per user (ARPU) on an annualized basis.

By the end of 2022, its net cumulative accounts had grown 1% to 23 million as its ARPU rose 3% to $66. Unfortunately, its MAUs contracted 34% year over year to 11.4 million as its AUC plummeted 37% to $62 billion. That staggering loss of active users and assets -- which was primarily caused by the exodus from the speculative investments that accounted for a large portion of its trading activity -- completely offset its anemic growth in net cumulative accounts and ARPU.

Robinhood's revenue decreased 25% to $1.36 billion in 2022. However, it narrowed its net loss from $3.69 billion to $1.03 billion as it laid off about 23% of its staff and paid fewer stock bonuses to its founders and top executives.

But some signs of a bottom are appearing

Robinhood's growth rates look dismal on an annual basis, but breaking down its four core growth metrics on a quarterly basis reveals a few green shoots.

Data source: Robinhood Markets.

Robinhood's number of net cumulative accounts held fairly steady over the past year, and its MAUs, AUC, and ARPU all improved sequentially in the first quarter of 2023. That stabilization is likely related to the S&P 500's and Nasdaq's year-to-date gains of 14% and 30%, respectively, as more retail investors waded back into the market.

The growing interest in AI-related stocks is also likely drawing back curious investors. According to Robinhood's own investor index, Nvidia, which produces powerful chips for processing AI tasks, is currently one of the top 10 holdings across all its accounts. Meanwhile, stabilizing crypto prices could also be convincing investors to buy more cryptocurrencies, which still accounted for 18% of Robinhood's transaction revenue in the first quarter.

Analysts expect its revenue to rise 36% to $1.85 billion in 2023 as Robinhood narrows its net loss to $561 million. We should take that outlook with a grain of salt, but it implies that 2022 represented the cyclical trough for its platform.

Some of Robinhood's regulatory headwinds could also be dissipating. The U.S. Securities and Exchange Commission (SEC) no longer seems interested in completely banning the PFOF transactions that subsidize Robinhood's commission-free trades, but it could still introduce more regulations for that controversial business model (which allows the company to sell its customers' orders to high-frequency trading (HFT) firms like Citadel). Its crypto business also still faces a murky future as the SEC cracks down on cryptocurrency exchanges like Coinbase and Binance.

It's not too late to buy Robinhood

Robinhood is a controversial company, but most of its slowdown seems to have been caused by macroeconomic headwinds instead of existential challenges. Its growth could accelerate significantly once the market stabilizes and the retail investors rush back, and it could remain a disruptive thorn in the side of traditional online brokerages such as Charles Schwab and Morgan Stanley's E*Trade. Robinhood's stock might remain volatile and languish below its IPO price for the time being, but I don't think it's too late to take a chance on its long-term recovery.