Robinhood Stock Continues To Disappoint as It Risks Becoming Generic

Since before Robinhood (NASDAQ:HOOD) stock went public a month ago, the phrase “Robinhood stock” has been part of the vocabulary.

These are stocks beloved of small investors, who often trade on Robinhood’s app and exchange views on Reddit’s r/Wallstreetbets.

But after looking at its June quarter earnings report and what has happened since, the ultimate Robinhood stock may be Robinhood itself.

Robinhood has everything a “bro trader,” a 30-something guy with cash who treats the stock market as a casino, might want. It has volatility. It has crypto. All it lacks are profits or revenue that can possibly justify a $37 billion market cap.

Hood stock shot out of the gates like Secretariat, shares hitting $70 on August 4. It trades today at about a little below $45.

The mobile Robinhood app moves markets because its users imitate hedge funds, ganging up on specific stocks. These are the folks behind Gamestop (NYSE:GME), AMC Entertainment (NYSE:AMC) and other money-losers.

A Closer Look at Hood Stock

Shorts were squeezed and fortunes made in days of frenzied trade. Those who get out at the top make fortunes. Those who don’t are left holding garbage.

That’s something the Securities and Exchange Commission (SEC) is worried about. If a broker gives you a rosy projection that turns out to be phony, they can be sued. How do you know that dude on Wallstreetbets isn’t just engaged in market manipulation?

Then there’s “payment for order flow, (PFOF)” the one weird trick Robinhood uses to make trading free.

Robinhood collects PFOF from brokers who execute its trades. Without it, Robinhood would have to charge you. PFOF is behind other retail brokers, like Charles Schwab (NASDAQ:SCHW), eliminating trading fees, too.

The idea the SEC considers eliminating PFOF “on the table” should rattle Robinhood stockholders.

The Posse Is Coming

What concerned me in the second-quarter report wasn’t Robinhood’s admission that trading was slowing. It does that every summer.

What concerned me was that half its trading revenue, $233 million, came from handling cryptocurrency. A fall in that market could wreck HOOD stock.

Also, competitors can copy its features, and that’s a bigger worry. Paypal (NASDAQ:PYPL) is looking into it. SoFi (NASDAQ:SOFI) is already doing it.

Once stock trading is an Application Program Interface (API) any company can do it. Betting that Robinhood can dramatically expand its user base purely on its brand name may not be a good bet.

Robinhood is trying to stay ahead of the game. It bought Say Technologies for $140 million last month. The idea is to improve communication between small shareholders and the companies they invest in.

I’m just not convinced the “bros” sending stocks “to the Moon” care to communicate. They all think they’re Blofeld-level Bond villians. They don’t want companies to talk, they want them to die.

The Bottom Line

TV analyst Jim Cramer pounded the table for Robinhood as it came public.

The timing of that call was lousy. It was Didi Global (NYSE:DIDI) lousy. Maybe Cathie Woods’ recent call, buying Robinhood on its dip, makes more sense. She’s buying to make it available to her ETF investors. Whether it rises or falls the dealer gets her cut.

My personal “bookie” is Schwab, up 38% so far in 2021. Their scaled systems give them a lot more technology debt than Robinhood. They also have $57 billion in cash with which to evolve their systems and deal with regulators.

Robinhood stock is for bros who like action. It’s for young traders looking for things to go “to the Moon,” fundamentals be damned. As an investor, I prefer Schwab.

On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.