Avoid Robinhood Stock as It Aims to Become a Full-Featured Fintech
Robinhood Markets (NASDAQ:HOOD) stock was hit hard by the latest tech wreck. But it is moving back up. Should you buy it?
Shares fell 40% after TV analyst Jim Cramer said Dec. 14 that he preferred old-line brokerage Morgan Stanley (NYSE:MS), up 5.5% since then. But Hood stock bounced off the lows after earnings.
It opened Feb. 1 at a little over $14/share. That’s a market capitalization of $12.07 billion for 2021 revenue of $1.82 billion, but no profits. Revenue is up over 80% from a year earlier.
Robinhood reported its full year earnings Jan. 27, a loss of nearly $3.7 billion, $7.49/share. The company said it expects first-quarter revenue to be off by 35%, and operating expenses for the full year to increase 15-20%.
Buy Signal for HOOD Stock
The results were only a buy signal to those who believe in the company. Robinhood said it lost 1.6 million active users during the fourth quarter, ending with 7.3 million. The Q1 revenue estimate was well below the near $450 million analysts expected.
Yet buyers came out of the woodwork. Cathie Wood’s ARK Innovation (NYSEARCA:ARKK) fund was among those buyers, picking up nearly 2 million shares. ARK Innovation lost 20% of its value during January.
Robinhood management said they’re doubling-down on growth, rolling out a cryptocurrency wallet and looking to extend trading hours as other electronic brokers have already done.
Analysts have been backing away from the stock in recent months, with 2 out of 13 at Tipranks now telling investors to sell, and the rest evenly split between buyers and those who say hold. Price targets are all over the map, from a low of $11 to a high of $45.
After the Revolution
Robinhood was the center of an investor revolution in 2021. Its commission-free trading encouraged small investors on Reddit’s WallStreetBets to launch short squeezes on behalf of names like AMC Entertainment (NYSE:AMC) and Gamestop (NYSE:GME). The stocks were boosted “to the moon,” but quickly fell to Earth. The January fall in technology stocks is expected to wash out some of those traders.
Instead, investors are loading up on stocks like Berkshire Hathaway (NYSE:BRK-A), up 12% in the last six months while the average S&P stock has been flat. Energy stocks like Exxon Mobil (NYSE:XOM) and Pioneer Natural Resources (NYSE:PXD) have also done well, as have traditional brokers like Morgan Stanley. Value stocks are the new fashion, and that’s not where Robinhood plays.
A Full Featured Fintech
Robinhood’s new strategy is to join the investment club, with tools for long-term investing banking services like debit cards. If it can get its users to buy its new offerings, it could still be a buy.
Robinhood bulls blamed $1.57 billion in stock-based compensation for the bad results, earned after Robinhood’s own spectacular rise. They note that compensation is expected to fall by 35-40% this year. Bears note that, even in 2022, stock-based compensation will represent over one-third of Robinhood’s projected revenue.
The Bottom Line
The January fall in tech stocks exposed a lot of greed and dirty business models, including Robinhood’s.
Investors are taught early to beware of companies buying growth with stock, diluting the stake of investors. Robinhood isn’t even buying growth with its dilution. It’s just paying its executives.
Far from representing the little guy’s revenge against Wall Street, Robinhood is just another bunch of greedy Wall Street hacks, using rhetoric and technology to hide the fact from unsuspecting investors.
Buying growth and buying technology make sense for small investors. Buying greed does not. I’m avoiding HOOD stock, and suggest you do, too.
On the date of publication, Dana Blankenhorn held no positions in any company mentioned in this story. 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 Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack.
