Is Robinhood Markets Stock a Buy Now?

Robinhood Markets (HOOD -2.18%) went public at $38 per share final July, and the web brokerage’s inventory closed at an all-time excessive of $70.39 lower than per week later. However over the previous yr, it tumbled under $10 as traders fretted over the corporate’s slowing progress, steep losses, and regulatory challenges.

Nonetheless, one of many major regulatory headwinds for Robinhood — a possible ban by the Securities and Trade Fee (SEC) on payment-for-order-flow (PFOF) trades — may lastly be dissipating. In line with a number of current media studies, the SEC will cease wanting banning all PFOF trades, but it surely may nonetheless take unspecified steps to restrict their profitability.

Does this constructive growth point out it is lastly protected to purchase Robinhood’s inventory? Let’s overview Robinhood’s progress charges, its dependence on PFOF trades, and a few longer-term challenges and catalysts.

Why did Robinhood’s inventory crash?

Robinhood initially appeared poised to disrupt conventional brokerages by offering commission-free trades to smaller retail traders. It additionally gained over first-time traders with its streamlined (and arguably “gamified”) app.

Nonetheless, Robinhood’s pursuit of smaller and fewer skilled retail traders grew to become a double-edged sword. Final yr, Reddit-driven buying and selling and stimulus checks drove these traders towards speculative meme shares, dangerous choice trades, and smaller cryptocurrencies in hopes of fast income. Because of this, its income surged 89% to $1.82 billion in 2021.

However as rates of interest rose, the market rotated away from these riskier belongings and towards extra conservative investments. That downturn, which led to a full-blown bear market this yr, precipitated Robinhood’s progress in month-to-month energetic customers (MAUs) and common income per person (ARPU) to stall out.

Because of this, the corporate ended the second quarter of 2022 with simply 14.0 million MAUs, in comparison with 21.3 million MAUs a yr earlier. Its ARPU additionally plummeted 50% to only $56. The common measurement of every Robinhood account (which is calculated by dividing its belongings underneath custody by its web cumulative funded accounts) additionally declined 38% yr over yr to simply over $2,800. Complete income fell 43% yr over yr within the first half of 2022, and analysts count on a 25% drop for the complete yr.

These dire numbers, together with ongoing losses, drove away the bulls. However even after that steep decline, Robinhood’s inventory nonetheless does not seem like a screaming discount at 6 occasions this yr’s gross sales.

Does the SEC’s stance on PFOF trades change something?

Robinhood subsidizes its commission-free trades via a PFOF system, which routes its orders via high-frequency buying and selling (HFT) companies. HFT companies course of so many trades that they are basically the “market makers” that decide the bid-ask unfold of many shares. Due to this fact, an HFT agency can fill a “commission-free” order — by executing the commerce on the desired value for the person investor — however nonetheless ebook a small revenue from every commerce.

In bulk, these trades are so worthwhile for HFT companies that they are keen to pay brokerages “rebates” to route thousands and thousands of orders via their machines. Proponents of this PFOF apply declare it is a win-win-win scenario: Buyers get commission-free trades, the brokerage features extra clients, and HFT companies acquire extra orders and ebook extra income. In the meantime, critics declare this apply prevents particular person traders from ever getting the perfect value for a safety, obfuscates the “actual” costs, and makes markets extra risky with their rapid-fire algorithmic trades.

If the SEC bans all PFOF trades, Robinhood would seemingly want to start out charging commissions. Lots of its traders would most likely balk at that concept, and its MAUs and ARPU would proceed to wither.

Nonetheless, an outright ban on PFOF trades by no means appeared like a viable choice for the SEC, since many different main brokerages — together with Morgan Stanley‘s E*Commerce and Charles Schwab — additionally subsidize their commission-free trades with PFOF agreements. Retail traders have additionally grown accustomed to free inventory trades.

A ban on PFOF trades would have precipitated main issues for Robinhood, however backing away from a ban additionally will not generate significant tailwinds as a result of it will merely retain the established order. Furthermore, the SEC may nonetheless generate headwinds for Robinhood (together with decrease funds from HFT companies) if it finds different methods to restrict the profitability of PFOF trades.

It is nonetheless not the precise time to purchase Robinhood’s inventory

Robinhood’s inventory initially rallied on Sept. 22 in response to the information in regards to the SEC, however gave up these features by the top of the day. The explanation was easy: Robinhood hasn’t solved any of its different urgent issues but.

As an alternative, Robinhood lately revealed that its MAUs fell to only 13.3 million on the finish of August, and that its belongings underneath custody had been nonetheless declining. Except Robinhood stabilizes these ongoing losses, traders will proceed to keep away from its inventory — no matter what the SEC decides to do about PFOF trades.