One of the worst ways to try to catch a big move in the stock market is to get carried away by news like institutional investors supporting beaten-down stocks like Robinhood Markets (NASDAQ:HOOD). Institutional investors know that when their investments moves are made public, retail investors will mimic them. So, they will push stock prices higher, making short-term easy gains for them. The problem is that retail investors may buy a rally that will soon fade away. Is Robinhood stock a good buy?
I argue that HOOD stock is a sell based on the latest first quarter (Q1) 2022 earnings and its focus on the crypto business.
Robinhood Markets, Inc.
Declines in Revenue and Monthly Active Users
Q1 2022 earnings were disappointing for Robinhood. There was a miss on both earnings per share (EPS) and revenue. EPS GAAP of negative 45 cents was a miss by 10 cents. Additionally, revenue of $299 million was a miss by 58.21 million. Making a list of negative factors in Robinhood’s Q1 2022 earnings is too easy and finding positive factors is too hard.
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The company reported that total net revenues decreased 43% and transaction-based revenues decreased 48%. A net loss of $392 million was reported, even though it was narrower than the net loss of $1.4 billion in Q1 2021. Monthly Active Users decreased 10% and Average Revenues Per User (ARPU) decreased 62%.
Robinhood seems to have a severe problem with slowdown in revenue growth. In the past three consecutive quarters, revenue growth was negative 34.95%, negative 0.69%, and negative 17.26%, respectively. Add in the fact that for the past five consecutive quarters, Robinhood has lost money and there seems to be a a very bearish view, making it a clear sell.
Betting on the Crypto Market May Be a Bad Idea
Robinhood is focusing on its cryptocurrency business. The latest news is that it will launch its Web 3.0 Wallet soon. It will be in Beta mode this summer and fully functional by the end of the year. The goal is for Robinhood to allow its customers to gain more control over their digital assets.
In Q1 2022, Robinhood reported that its revenue from cryptos decreased 39% to $54 million, compared to $88 million in the first quarter of 2021. The crypto market is weak and my prediction is that with at least two upcoming 50 basis point rate hikes by the Federal Reserve, more losses should be expected for digital currencies. Continued lower trading activity in the crypto market will lead to lower revenue growth for Robinhood. As options and stock trading also decline, the lower revenue trend is expected to continue.
Robinhood reported that its ARPU decreased 62% and that “[on] a sequential basis, ARPU decreased 18% compared with $64 in the fourth quarter of 2021.” This is also very negative for HOOD stock.
What Is the Forecast for Hood Stock?
14 analysts have a median target of $11.75. However, analysts have mixed ratings for HOOD stock. Four analysts have a “strong buy” rating and six analysts have a “hold” rating. In total, the consensus rating is a “hold.”
I agree with one analyst who has a “sell” rating and the two analysts who have a “strong sell” rating. If you consider HOOD stock a bargain after having losses of 47% in 2022, consider the above arguments. Why buy shares of HOOD stock when the fundamental picture shows multiple core weaknesses?
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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