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Robinhood stock: As crypto drops, this is going to be tough (NASDAQ: HOOD)

Kimberly White

investment thesis

Robin Hood (Nasdaq: hood) Its shares have surged since summer lows of $7 a share as investors believe Robinhood’s restructuring plan will be enough to correct this ship.

However, I am still bearish.

HOOD stock rating

Author’s work

I We believe that the recent bearish moves in the cryptocurrency will further affect the willingness of investors to trade on the Robinhood platform. This goes against Robinhood last comment.

As Robinhood brokerage clients have fewer crypto transactions, this will lead to poor revenue in the near term, missing Robinhood analyst estimates for Q4 2022.

In short, avoid this name.

Robinhood’s August numbers, here’s the good news

Robinhood Operating Data for August

Robinhood Operating Data for August

For August, Robinhood’s cumulative net deposits were up 26% year over year. This coincided with the market rally since summer lows.

Schedule
data by YCharts

And as a proxy for the retail equity interest, I used ARK (ARKK). As you can see above, from early July to mid-August, ARKK was up 50% during those two months before selling at the end of August.

Hence, I think that’s very positive for Robinhood’s third-quarter results. This led to a short-term bounce in HOOD as investors sought to buy the dip by this name.

But I don’t think that’s a lasting value on this latest pop.

I think the recent increase in its share price will soon turn lower, as investors look beyond Q3 and Q4 of 2022.

Robinhood’s Q4 results will be weak

Robinhood Q2 2022 Presentation

Robinhood Q2 2022 Presentation

As you can see above, going back to the fourth quarter of 2020, about two years ago, Robinhood’s revenue from cryptocurrency was pretty negligible as a percentage of total revenue.

And when we compare Robinhood’s exposure to cryptocurrency in the fourth quarter of 2021, $48 million of its $264 million in total revenue was derived from cryptocurrency revenue (see Slide 24).

Thus, as the cryptocurrency market continues its bearish trend, there is a significant increased risk to Robinhood’s fourth-quarter earnings.

Accordingly, I think it is very likely that as Robinhood enters Q4 2022, next month, Robinhood’s crypto revenue will decline so that Q4 2022 will reach less than $30 million in revenue this quarter.

Thus, when Robinhood announces its results for the fourth quarter of 2022 as early as 2023, investors will be in for a negative surprise.

HOOD stock valuation – 6x revenue 2022

Robinhood is still priced at 6 times this year’s revenue. Given that this market is becoming increasingly selective about value, I don’t think paying 6x revenue this year to Robinhood, a company with poor visibility, is a good investment.

When I look around at the different opportunities I have, I see countless high-quality companies with long runways priced at 6 times sales.

For example, within cybersecurity companies or enterprise software companies, there are many companies that have many of the 500 companies as their clients. Retail investors are not facing a cost-of-living crisis.

Moreover, these attractive companies are growing at rapid rates and are either already profitable or have a clear path to profitability. And they are priced at 6 times the sales!

Hence, why would investors risk paying 6 times Robinhood’s sales?

Seriously, I think this is an investment with a poor risk-reward profile.

bottom line

Since Robinhood’s IPO, it seems to have hit one rough patch after another. Now that we are entering a ‘new bear market’, I find it difficult to be optimistic about this company’s outlook.

In particular, I focus the bearish investing thesis not so much on Robinhood’s third-quarter 2022 results, which I think, as discussed above, could positively surprise the investment community but in the fourth quarter of 2022 from Robinhood, when I think investors’ desire to trade Cryptocurrency on Robinhood platform can be drastically reduced.

Even though the stock price has fallen dramatically, by more than 70% since its IPO, I still find very little value on offer for new investors coming into this stock.

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