Robinhood’s debut on the NASDAQ was heralded as one of the biggest flotations of 2021, but after a period of early volatility, shares in the wildly popular retail investment app have been steadily declining throughout August and September. Could HOOD’s slumping price represent an attractive buy opportunity for investors? Or is it the beginning of a more prolonged regression?
Shares in Robinhood have fallen some 29% between early August and early September, leaving the investing platform with a market cap of $36 billion and a share price that’s hovering around the $40 mark at the time of writing.
Although the past month hasn’t been filled with inspiration for investors, it’s worth noting that share prices still remain higher than HOOD’s initial NASDAQ debut, trading some 15.77% higher than its opening day, at the time of writing.
It’s also worth noting that Robinhood’s $36 billion market capitalization falls almost perfectly in line with the company’s pre-IPO valuation, perhaps indicating that the past month of corrections represents more of a reversion to a stable value. However, this still won’t come as good news to shareholders who bought in during the peak of the stock’s early volatility.
Forbes notes that the US Securities and Exchange Commission Chairman Gary Gensler has indicated that the agency is considering outlawing the payments for order flow business model in which Robinhood relies on as a zero-commission brokerage.
While the operating model is highly controversial due to the selling of users’ order flow as a means of making money without a traditional commission system in place, it also appears to be popular among retail investors.
(Image: Nasdaq)
As we can see from the available Nasdaq data, the payment for order flow operating model that enabled retail brokerages to offer zero commissions on trades helped to spark a boom period in terms of adoption. The threat of the SEC ripping this model out is likely driving Robinhood’s share price lower as investors steer away from the uncertain climate.
The Threat of PayPal
Another piece of emerging news that’s affecting Robinhood’s share prices stems from PayPal’s wading into the investment ecosystem. The payment giants are reportedly looking to launch a stock trading feature that would come into direct contention with Robinhood and Square’s similar features. Although sources have claimed that the feature won’t be arriving in the short term, the news indicates some of the larger existential threats to the freshly public company.
According to CNBC, the payment processing company reportedly hired brokerage industry expert, Rich Hagen as part of its move to develop a leading platform for investment.
Although PayPal is yet to confirm its plans, CEO Dan Shulman’s comments at the company’s investor day in early 2021 highlighted that the long-term vision of the company was to incorporate more financial services into its range of offerings – including “investment capabilities.”
(Image: SeekingAlpha)
Although PayPal is a global leader in the fintech sector, there’s no doubt that the platform would have to do some considerable work to interrupt Robinhood’s impressive 2021 growth – in which the company almost doubled its active user base across just two-quarters.
Room for Growth
Despite Robinhood clearly facing a battle to consolidate its position at the pinnacle of retail investing apps, CNBC’s Jim Cramer has been vocal in his support for the platform and the direction that it’s heading – indicating that the current price of Robinhood’s stocks represented a buy opportunity for investors.
“As Robinhood branches out into other forms of finance, including ‘buy now, pay later’ cards, I think CEO Vlad Tenev’s army of 22 million users will grow and become more powerful,” Cramer said, highlighting how the app has captured the attention of younger retail investors.
“That’s why I’m telling you that Robinhood can be bought here. If Square can rally 10% on this Afterpay deal, imagine what Robinhood could do if they acquired someone else in the industry — think Affirm. The stock would soar.”
Maxim Manturov, head of investment research at Freedom Finance Europe says “Robinhood created an easy-to-use stock trading app, with the number of active users growing from 4.30M in 2019 to 17.70M in Q1 2021. Meanwhile, the total earnings rose from $277.533 million in 2019 to $958.833 million in 2020 (+245% YoY), and from $127.550M to $522.174M in Q1 2021 (309% YoY). The net profit margin in 2019 was at -38.39%, in 2020, at 0.007%, and in Q1 2021, at -36%. Overall, given the current performance and business model, Robinhood may have more growth potential moving forward.”
It’s also certainly worth highlighting Robinhood’s incorporation of crypto assets into its offering for investors. Although the cryptocurrency market has experienced some severe volatility moving into the summer months, the adoption of currencies like Bitcoin has been accelerating as retail investment platforms have offered easy access to assets.
In the chart above, we can see that search intent for Bitcoin has risen in 2021 to levels that haven’t been seen since the coin’s famous rally of late 2017.
Recently, Freedom Finance Europe projected a 35% yield over the coming three-to-six months for fellow cryptocurrency investment stock, Coinbase, citing growing trading volumes across the cryptocurrency landscape and product development.
With some six million new cryptocurrency traders arriving on Robinhood in the opening two months of 2021 alone, we can see clear evidence that the popular brokerage has a commanding position across a wide range of markets – and far more than that of more traditional financial platforms.
Although Robinhood’s share price has been steadily declining in light of regulatory uncertainty and the threat of new competitors, it’s worth noting that the company has already innovated its way towards winning over retail investors ahead of its traditional counterparts. If there’s any company out there that’s capable of arresting a slump and winning over investors, it’s certainly Robinhood.
