Zero-commission trade pioneer Robinhood Markets, Inc. (HOOD) had a disappointing stock market debut on July 29, 2021. However, after the IPO the stock rallied to hit its all-time price high of $85 on August 4, due partly to retail investors’ interest and Cathie Wood’s investment in it. However, the stock has declined 34.1% in price since hitting its all-time high, to close yesterday’s trading session at $45.29.

HOOD’s second-quarter revenue soared due primarily to increased cryptocurrency trading. However, with the Federal Reserve inching closer to tapering its asset purchases, investors might rotate away from riskier assets, such as cryptocurrency.

Furthermore,  HOOD’s management said, regarding the third quarter, that “we expect seasonal headwinds and lower trading activity across the industry to result in lower revenues and considerably fewer new funded accounts than in the prior quarter.” So, HOOD’s near-term prospects look bleak.

Here’s what we think could shape HOOD’s performance in the near term:

Controversy Over Halting Trades

Several investors were furious at HOOD because  it restricted the trading in heavily shorted names such as  GameStop Corp. (GME) on January 28. One of the company’s users filed a class-action lawsuit that day, claiming that HOOD removed the video game retailer “purposefully and knowingly to manipulate the market.” In addition, HOOD now faces roughly 90 lawsuits regarding its  temporary halting of the trades.

Fine Imposed by FINRA

The Financial Industry Regulatory Authority (FINRA) fined HOOD $70 million for outages and misleading customers. This is the largest-ever FINRA penalty. The settlement is regarding  technical failures HOOD experienced in March 2020. The company neither admitted nor denied the charges but consented to FINRA’s findings. Also, as the SEC considers new rules to rein in ‘gamification’ and payment-for-order flow, HOOD could continue to face legal and regulatory issues.

Top Line Growth Doesn’t Translate into Bottom Line Improvement

HOOD’s total revenue surged 131.5% year-over-year to $565.33 million for the second quarter, ended June 30, 2021. The rise in cryptocurrency trading was primarily responsible for this increase. Its revenues from the cryptocurrencies segment came in at $233 million in the quarter, versus $5 million in the year-ago period. However, its average revenue per user (ARPU) was  $112 compared to $115 in the prior-year period.

HOOD’s total operating expenses increased 168.9% year-over-year to $500.73 million in the second quarter. Its net loss was  $501.67 million, versus  $57.58 million in net income in the prior-year quarter. In addition, its loss per share was  $2.16 compared to $0.09  in EPS in the year-ago period.

POWR Ratings Reflect Bleak Prospects

HOOD has an overall F rating, which equates to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. HOOD has a D grade for Sentiment and an F grade for Growth. These are justified because analysts expect its EPS to remain negative in the current year.

Also, the stock has an F grade for Value, which is consistent with its 19.50x forward P/S, which is 489.1% higher than the 3.31x industry average.

In addition to the POWR Rating grades I’ve just highlighted, we’ve also rated HOOD for Stability, Quality, and Momentum. Click here to get all the HOOD ratings.

HOOD is ranked #134 of 144 stocks in the D-rated Software – Application industry.

Click here to check out our Software Industry Report for 2021

Bottom Line

HOOD is one of the popular trading platforms for retail investors. However, the company is  involved in many controversies. In addition, it released disappointing earnings results in the second quarter and could witness lower trading activity in the current quarter. So, we think it’s wise to avoid the stock now.

How Does Robinhood Markets (HOOD) Stack Up Against its Peers?

While it’s better to avoid HOOD now, one  might take a look at its A-rated (Strong Buy) industry peers: Commvault Systems, Inc. (CVLT), Open Text Corporation (OTEX), and Mimecast Limited (MIME).

HOOD shares rose $0.57 (+1.26%) in premarket trading Tuesday. Year-to-date, HOOD has gained 31.53%, versus a 20.46% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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