Topline
Shares of Robinhood plummeted Friday after an analyst at Goldman Sachs, one of the investment banks underwriting the online brokerage’s initial public offering last year, issued a bearish rating for the stock, extending a months-long decline that has wiped nearly $50 billion in value.
Robinhood’s user growth, which exploded early in the pandemic, has “remained depressed” amid a tepid … [+]
Key Facts
Robinhood stock fell nearly 7% Friday morning to about $11.25, the stock’s lowest level in nearly a month and about 84% below an all-time closing high last August.
Triggering the morning plunge, Goldman analyst Will Nance issued a sell rating for the stock Friday morning, saying a “limited path to near term profitability,” weak account growth and softening engagement from less-sophisticated investors will likely pose headwinds for the stock over the next 12 months.
In the short term, Robinhood’s user growth, which exploded early in the pandemic, has “remained depressed” amid a tepid start to trading this year, Nance said, citing app download data and saying accelerated growth will be key for the stock to move higher.
Other experts have also soured on the stock: Deutsche Bank analyst Brian Bedell lowered his Robinhood price target on Thursday to $11 from $14, saying he is “growing more cautious” about the market environment for brokers, exchanges and asset managers this quarter, particularly with rising interest rates posing a threat to earnings.
Last week, JPMorgan’s Kenneth Worthington cautioned the stock market’s selloff this year has “hobbled” growth and activity for trading platforms in what is typically the strongest quarter of the year.
Key Background
Shares of Robinhood have been on a wild ride since their buzzy trading debut on the Nasdaq exchange last July. Buoyed by fervent retail trading, shares skyrocketed more than 60% in days, reaching a closing high of $70 in early August. At the time, billionaire cofounder and CEO Vlad Tenev defended the frenzied retail trading, which helped Robinhood revenues climb three-fold in the first quarter. “I think it’s a real thing,” Tenev said, also acknowledging the uncertainty around the “ramifications of what high retail participation in the markets mean.” The fervor has largely cooled since, marred by growing scrutiny over payment for order flow—the controversial practice in which brokers like Robinhood send trade orders to market makers, who execute those trades (sometimes at inferior prices, critics argue) and kick back a portion of the profit.
Chief Critic
“If regulators were ever to outlaw payment for order flow, Robinhood’s revenue would be severely affected,” says David Trainer, the CEO of investment research firm New Constructs, positing a ban would force exchanges to drop free trading and put them at a “significant disadvantage” to rivals Fidelity and Charles Schwab. SEC Chair Gary Gensler last August said a full ban was “on the table,” but analysts predict stricter regulations may be more likely.
Big Number
$1.8 billion. That’s how much revenue Robinhood posted last year, more than 77% of which came from payment for order flow.
Further Reading
Robinhood Rival Public.com Pitches Town Halls And Analytics To Reach Retail Investors (Forbes)
Billionaire Trader Ken Griffin Navigates A Flock Of Black Swans (Forbes)
Source: https://www.forbes.com/sites/jonathanponciano/2022/04/08/robinhood-stock-plunge-steepens-after-goldman-warns-investors-should-sell-amid-depressed-user-growth/