Robinhood (NASDAQ: NASDAQ: HOOD) as the company expanded rapidly during the pandemic and consumers wanted to invest their stimulus funds. Whether it was the rise of cryptocurrencies or the madness of meme stocks, consumers did don’t want to miss the action.
Now that the dust has settled and we’re beginning to experience a tougher macro environment, Robinhood’s top line and profitability must deteriorate significantly.
With the stock down over 50% so far this year and over 80% from all-time highs, the company seems to have timed the market perfectly for its IPO. In 2020 and 2021, consumers received multiple stimulus payments, meme stocks took over, and the average investor learned more about cryptocurrencies.
I believe that these positive factors have led to a significant increase in personal investment trading platforms. However, I believe the macro environment could remain challenging in the coming quarters, and with Robinhood’s transaction-based revenue above 70%, the company could continue to see a deterioration in monthly active users and profitability. If the company continues to lose users and the average consumer makes fewer transactions, that could double the impact on growth.
For now, I believe long-term investors should remain cautious and stay away from this downtrend. While I believe Robinhood has a great platform and one of the best user interfaces, I believe the stock will continue to be under pressure in the quarters to come.
Financial Report and Outlook
In the first quarter, revenue fell 43% year over year to $299 million and was nearly $60 million below consensus expectations. Transaction-based revenue, which accounts for just over 70% of total revenue, fell 48% year over year to $218 million. It’s clear that during the market downturn, consumers started using Robinhood a lot less as the number of transactions decreased.
While net interest and other income declined less than the company’s total income, overall trends during the quarter were not favorable. Options revenue was down 36% to $127 million, cryptocurrencies were down 39% to $54 million, and stocks were down 73% to $36 million. No major trends at the start of the year.
Non-GAAP Adjusted EBITDA was also a loss of $143 million compared to a positive $115 million in the prior-year period. The big swing in Adjusted EBITDA was largely due to a significant revenue decline coupled with continued high operating expenses. Yes, I understand that the company’s long-term vision requires significant capital investments, but management needs to focus more on a healthy balance of growth and profitability for the stock to work over the longer term.
Dishearteningly, monthly active users actually experienced a nearly 2 million year-over-year drop. In the first quarter, MAUs came in at 15.9 million, which was also the third consecutive quarter of declining users. In addition to declining users, average revenue per user fell 62% year over year to $53, also down 18% sequentially.
Some of the declining MAUs can be attributed to increased competition in the market, although management also noted challenging macroeconomic factors.
Digging down a level, our larger customers still remain active, but we see more significant declines among those with lower balances. With the uncertainty in the market, our clients became more cautious with their portfolios and traded less frequently and in smaller amounts across all asset classes, although crypto activity in particular dropped quite significantly.
In my opinion, investment trading platforms have become very competitive as consumers have many options to choose from. Alongside the traditional brokers that have been around for decades, newer platforms like Robinhood have popped up in recent years.
Let’s remember that 2020 and 2021 could have been some of the best market conditions for trading platforms. Aside from the significant pandemic-related pullback, which provided good buying opportunities, several other factors played a role.
First, consumers have been inundated with cash as they receive multiple rounds of stimulus payments. Because certain forms of debt repayment have been delayed, such as B. student loans, the consumer balance improved significantly, giving people funds to invest.
Additionally, the meme craze made everyday investors very interested in the stock market. With the rise of Reddit and other networking boards discussing the stock market, consumers have been inundated with investments.
Finally, the significant rise in cryptocurrencies prompted many consumers to find ways to invest. Whether it was fear of missing out on potential returns or long-term belief in cryptocurrencies, consumers wanted to invest.
During the earnings call, management spoke of a challenging macro environment, and the company recently announced that it is laying off nearly 10% of its workforce to improve profitability.
So I’ve challenged the team to delve deeper into cost discipline and bring us to Adjusted EBITDA profitability by the end of the year. We are moving back to a leaner operating model, beginning with the staff reductions that we announced earlier this week. But make no mistake, Robinhood still plays offensively and charges ahead. We continue to work on our roadmap for 2022. And we have several new products on the market that we believe will add value to customers while generating significant revenue.
I believe the macroeconomic environment will become increasingly challenging in the coming quarters. Rising interest rates, global disruption from the Ukraine war, supply chain issues, high inflation, fears of recession. These are all recent events that have weighed on the stock market.
Also, let’s not forget that when times are tough, consumers are likely to be less interested in investing in the stock market, cryptocurrencies, or other assets. The average consumer has seen their personal balance sheet improve in recent years given the numerous benefits seen from stimulus programs. As those cash buffers shrink and a possible recession looms, trading platforms like Robinhood could come under increased pressure.
With monthly active users and revenue per user continuing to decline sequentially, it’s no surprise that the stock is down over 50% for the year to a decline and over 80% from all-time highs.
When the company went public in mid-2021, we might have been in one of the best environments for the consumer. The average person received multiple stimulus payments, debt repayments were deferred in many cases, and people were stuck at home. This combination naturally led to an interest in investing in stocks and cryptocurrencies.
However, given a challenging macro backdrop of rising interest rates, high inflation and recession fears, the healthy consumer may be starting to feel some pain. While it’s not certain, I believe that when times get tough, consumers will be less focused on investment trading platforms as they may be more focused on making a paycheck to pay the bills.
Right now, the stock is currently trading at around 2.5 times forward earnings, which is a notable drop from its historical 5 to 7 times forward earnings. Revenue growth is likely to remain volatile over the long term since much of their revenue is transaction-based. As a result, consumers don’t constantly transact on the platform, Robinhood generates less revenue.
This also makes long-term profitability a challenge. In the good times of 2020 and 2021, Robinhood was able to generate a positive adjusted EBITDA. As markets have retreated and the macro environment has deteriorated, so has Robinhood. This name is very cyclical and given fears of a possible economic slowdown and/or recession, I believe this name may continue to face negative sentiment. If we start to see an economic slowdown, consumers may have less cash available for day trading and may stop using trading platforms as frequently.
Ultimately, Robinhood is a cyclical company that tends to do very well in prosperous times and underperform in challenging times. As we begin to enter a potentially slower growth phase, as economists are estimating, consumers may not have excess funds to invest. The combination of continued MAU decline and lower profitability per user is worrying.
While the stock has continued its downtrend, I believe there is some bottom to watch for. The company has approximately $6.2 billion in net cash on its balance sheet, which translates to over $7 in cash per share. With the stock currently trading just above $9, it’s clear that investors aren’t placing much value on the underlying stock.
I’m not saying investors should buy the stock just because of the high cash position, but I think it could offer soft ground. I also wouldn’t be surprised if the stock resumes its downtrend and trades below the $7 net per share mark.
For now, I’m staying on the sidelines as we could see the stock trending further down.