Robinhood: It’s time to dive in for the long haul (NASDAQ:HOOD)

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We all know this fact, but we are often too cautious to act on it: there is never a better time to invest than in a crisis. And while the broader market (and tech stocks in particular) has been in turmoil this year, few equities were hit harder (both from a stock price and fundamental perspective) as Robinhood (NASDAQ: HOOD).

Once a Silicon Valley darling and a blockbuster when it went public, Robinhood has seen significant declines in its stock since its IPO. The problem is the fact that, especially since the beginning of the year, business activity is down. Compared to 2021, when markets were in a bullish mania and retail investors escalated to trade the latest meme stocks, 2022 has been lackluster and dismal in markets – and that’s directly impacting revenue for Robinhood.

Data by YCharts

Still, I see hope for this company. When we step back, we need to remember the longer-term bullish factors for Robinhood:

  • Robinhood dominates the Millennial/Gen Z demographic that will soon overtake the bulk of the world’s wealth. Traditional brokers are still catching up with Robinhood’s popularity. Market cycles have always existed and will continue to exist; there will be periods of frantic trading and there will be periods of calm. But over time, Robinhood’s share of market activity will increase.
  • Product innovation never stops. Part of what makes Robinhood so appealing is that it’s often the first to market (or at least the first to popularize) many key new features. Crypto trading, cash advances, and easy access to low-cost margin were some of the main defining benefits of Robinhood; other upcoming features include 24/7 trading and retirement accounts.
  • Profitable on an adjusted EBITDA basis. Robinhood is roughly just above break-even based on adjusted EBITDA. On a much larger scale, the company will be able to significantly increase its profits.

In my opinion, now is the perfect time to invest in Robinhood for the long term (but bear in mind that a rally can take a year or more to materialize) after its stock has fallen around 80%. from historic highs.

Robinhood’s aggressive product roadmap continues to set it apart from its peers

Currently, investors are bearish on Robinhood as the general perception is that investor interest in the platform has permanently diminished. I couldn’t think that was further from the truth. While the frequency and mania of trading has certainly decreased from 2020/2021 levels, I believe Robinhood’s continued focus on platform expansion and product rollouts will drive engagement from its user base.

Robinhood 2022 roadmap

Robinhood 2022 Roadmap (Robinhood Q4 Investor Presentation)

Robinhood’s mantra, of course, is to make investing accessible to everyone. This means opening the door to all types of accounts and account holders. To date, Robinhood has only offered traditional brokerage accounts, but in 2022, the company plans to roll out retirement accounts (traditional and Roth IRA).

Now is a great time to launch retirement accounts, just as many young Robinhood users are planning to start retirement for the first time. IRAs also have the advantage of being longer-term accounts that users will typically maintain and grow over a long period of time, which will hopefully help reduce churn on the platform.

Robinhood also hopes to introduce securities lending in the first half of 2022. Securities lending helps investors earn extra money from their stock holdings by lending them to institutions for the purpose of short selling. Adding this particular feature helps Robinhood A) entice investors to transfer more of their portfolios to the platform, and B) compete with Interactive Brokers, one of Robinhood’s fiercest competitors in the space. online/low-cost brokerage (Interactive Brokers currently offers both lower margin rates as well as securities lending capabilities, but where it is weaker than Robinhood is that most accounts don’t don’t offer free trades and the user interface is not user-friendly for casual investors).

Although less splashy than retirement accounts and securities loans, Robinhood is also working hard to start offering ACATS support. ACATS (or Automated Client Account Transfer Service) is the means by which investors can transfer assets from one brokerage firm to another. Adding this support alleviates the friction potential users will face when switching from another brokerage to Robinhood.

On the crypto side, Robinhood also releases crypto wallets (where users can securely store and spend their cryptocurrency) as well as the ability to gift crypto to other users. Crypto now accounts for almost an equivalent amount of Robinhood’s transactional revenue as “vanilla stock”. What I think Robinhood does incredibly well in the crypto space is help new crypto investors get in for the first time. Crypto’s popularity has skyrocketed since 2020, but trading through specialist exchanges like Coinbase can sometimes seem too advanced for nervous novices. Robinhood helps bring a patina of security to crypto investors who are about to enter.

The company also hopes to open up its crypto trading capabilities to users beyond the United States in 2022. Now primarily an American company, Robinhood still has vast untapped potential customers to hunt across national borders.

Funded accounts and revenue have largely stabilized

Without looking at the numbers, many investors feel that Robinhood’s user base has been decimated since last year’s trading mania eroded. Not true: As the chart below shows, Robinhood’s total funded accounts ended Q4 with an all-time high of 22.7 million users, adding 0.3 million net new users. during the quarter.

Robinhood Accounts

Robinhood Accounts (Robinhood Fourth Quarter Investor Presentation)

New accounts funded in the quarter were 0.8 million – not quite as high as 5+ million in the first two quarters of FY21, but above 0.7 million in Q3. Churn is also down from Q2 and Q3. On the contrary, we can confidently say that Robinhood’s account base has stabilized. Jason Warnick, the company’s chief financial officer, noted on the fourth quarter earnings call that churn rates hit multi-year lows:

Looking to the fourth quarter, we added 300,000 net funded accounts during the quarter. New funded accounts totaled 800,000; churned counts totaled 700,000; and resurrected accounts totaled 200,000. For churn, we saw a 19% reduction from Q3, and as a percentage, churn was at its lowest level in the past year and half. Finally, we had $4.4 billion in net customer deposits for the quarter, up 93% sequentially but down 32% year-over-year. »

Revenues aren’t as bad as many might think. In Q4 (Robinhood’s last quarter), total net revenue of $363 million was up another 14% year-over-year.

Breaking down the transactional portion of Robinhood’s revenue: We can see equity trading revenue has stabilized at around $50 million per quarter. Despite being down -35% year-on-year, options income – which is now triple the contribution of equity income – rose 15% year-on-year to $163 million in the fourth quarter . Crypto revenue has also grown about 4x per year, and while not close to the Q2 peak, crypto now contributes roughly the same amount of revenue as stock trading. .

Robinhood Revenue Breakdown

Robinhood Revenue Breakdown (Robinhood Q4 Investor Presentation)

There’s no doubt that Robinhood’s business will always be lumpy and dictated by the mood of the markets. But market fluctuations come and go, as they always have. At some point, commercial interest will pick up, and Robinhood’s broader product platform and growing user base can capitalize on this moment.

Key points to remember

Don’t expect Robinhood to make a comeback overnight – but as long as you think investing will become more mainstream among retail investors and trading activity picks up, there’s no reason not to. not buy Robinhood at historic lows.

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