Is Robinhood Markets Stock a Buy Now?

Robinhood's (HOOD 4.44%) stock sank 7% on Aug. 3, after the online brokerage posted a mixed second-quarter report. Its revenue rose 53% year over year to $486 million and beat analysts' estimates by $8 million.

On the bottom line, it generated a net profit of $25 million, which marked its first profitable quarter and a vast improvement over its net loss of $511 million a year earlier. However, its EPS of $0.03 still missed the consensus forecast by nine cents.

Those headline numbers weren't bad, but Robinhood's sequential loss of monthly active users (MAUs) and a sequential drop in transaction revenues raised a few red flags. Let's review the soft spots and see if investors should still buy this volatile fintech stock.

Image source: Getty Images.

Has Robinhood passed its cyclical trough?

Robinhood's commission-free trading platform drew in millions of retail investors during the buying frenzy in growth stocks, meme stocks, speculative options, and cryptocurrencies in 2021. By the end of that year, Robinhood had 22.7 million net cumulative funded accounts, 17.3 million MAUs, and $98 billion in assets under custody (AUC). Its annualized average revenues per user (ARPU) had also risen to $64.

But in 2022, rising interest rates drove investors away from riskier assets. As a result, Robinhood's users traded less frequently, causing a steep decline in its MAUs, and the market's downturn reduced the market value of its assets under custody. So over the past year, investors have been waiting for those metrics to gradually bottom out.

Data source: Robinhood Markets.

As this table illustrates, Robinhood's net cumulative accounts continue to rise as its AUC recovers with the broader markets, but it's been struggling to grow its MAUs. Its sequential growth in MAUs in the first quarter suggested that brighter days were ahead, but its loss of a million MAUs in the second quarter quickly dampened those hopes.

On the bright side, the expansion of Robinhood's Gold subscription plans -- which provide higher interest rates on uninvested cash, lower-margin investing costs, and access to advanced trading tools for $5 a month -- has been gradually boosting its ARPU. It expects its recent acquisition of the credit card start-up X1 and the introduction of other personal-finance features to further boost its ARPU while expanding its fintech ecosystem.

It still relies heavily on speculative traders

Another issue is Robinhood's high dependence on riskier option and crypto trades, which generated 66% and 16% of its transaction-based revenue, respectively, in the second quarter. Stock-based trades accounted for just 13% of that revenue. During the second quarter, Robinhood's total transaction-based revenue declined 7% sequentially, driven by a 5% drop in options revenue, an 18% decline in crypto revenue, and a 7% decrease in equity-based revenues.

That represented a disappointing reversal from its 11% sequential growth in transaction-based revenue in the first quarter, when its option revenue rose 7%, its crypto revenue fell 1%, and its equity-based revenue rose 29%.

That sequential slowdown, along with its loss of MAUs, suggests the market's recovery still isn't inspiring Robinhood's customers to aggressively trade options, cryptocurrencies, or stocks again.

But don't ignore the bright spots

Robinhood might not have reached its cyclical trough yet, but its aggressive cost-cutting measures, including over 1,000 layoffs last year and another 150 layoffs this year, are stabilizing its profit on the basis of generally accepted accounting principles (GAAP). During the conference call, CFO Jason Warnick said the company will "continue to focus on driving profitable growth over time." However, Warnick didn't offer a precise outlook for its revenue or its GAAP profit for the full year. Analysts expect its revenue to rise 40% to $1.9 billion as it narrows its net loss from $1.03 billion to $463 million.

That's a pretty impressive growth rate for a stock that trades at just five times this year's sales, but the company still faces intense competition from traditional brokerages, such as Morgan Stanley's E*Trade and Schwab, in the commission-free trading market. That pressure could make it tough for Robinhood to gain new users, expand its margins, and generate consistent GAAP profits.

Is it the right time to buy Robinhood?

Robinhood's stock has already risen about 40% this year in anticipation of its gradual recovery, but I think it's still too early to turn bullish. So for now, I wouldn't touch Robinhood's stock until it stabilizes its MAU growth, shows that it can successfully expand its fintech platform, and generates a few more quarters of stable GAAP profit.