Robinhood Stock: Even Now, Don't Buy This

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Investment Thesis

Robinhood (NASDAQ:HOOD) enters a new chapter in its life. It no longer provides investors with guidance, as it readily admits that it has no ability to forecast its revenue growth rates.

Even as its stock continues to fall in price, this does not mean that Robinhood is undervalued. Meanwhile, Robinhood is forced to lay off a large portion of its staff as it attempts to right-size the business.

The only tepid bullish consideration that investors can lay claim to is that Q1 2022 was up against the toughest comparables with last year’s strongest quarter. For the remainder of 2022, Robinhood’s revenue growth rates should be up against easier comps.

That being said, playing the quarterly game is a tough game. Investors would do well to reconsider this investment for what it is, not how much the share price has fallen.

In other words, as I look ahead, I have no reason to be bullish on this investment.

My History With Robinhood

Please take a moment to read through these titles in reverse chronological order:

Author’s coverage of Robinhood

My stance on Robinhood is unmistakable. Even if you were wanting to buy the dip, and only got involved with the stock in 2022 your return would have probably been around this:

Author’s coverage of Robinhood

If you’ve read my work before, you know that when the facts change, I’m more than willing to admit I’m wrong and change my mind. Here, in this instance, I see nothing to justify anything but holding a bearish view of Robinhood.

Robinhood’s Revenue Growth Rates Tell You Everything You Need to Know

Robinhood revenue growth rates

Above you see a reminder that Robinhood’s fastest growth days are now firmly in the rearview.

The bullish investment thesis for investors is to ”hope” that going forward Robinhood will stabilize and that all the bad news is now out and factored into its share price. That’s the only bullish consideration.

Otherwise, you are looking at a business that many still believe to be a growth business, but it’s actually one that will in fact struggle to grow above 20% CAGR in any sustainable manner.

Why Robinhood Is Not a Growth Company

If you have followed my work before, you’ll have read my argument that you should follow a company’s user growth trajectory, as that will cut through any narrative and tell you the facts for what they are.

Robinhood user growth, monthly

In the graphic above you can see clear evidence that Robinhood is not a growth company. For several months, Robinhood’s user growth numbers have been flat.

For a company that’s supposedly disrupting financial markets, it appears that customers aren’t finding much value in its offering.

HOOD’s Profits Do Matter

In the table below, I highlighted in red Robinhood’s positive cash flow contributions.

Robinhood Q1 2022 cash flows

Asides from positive working capital from its receivables and extending accounts payables to users, nearly 50% of the cash flows during Q1 2022 come from stock-based compensation.

What’s more, given that Robinhood’s share price continues to fall in value, we can only expect Robinhood to increase its stock-based compensation payout if it wishes to retain top-executive talent.

Because after all, management is eyeing up their compensation package, and given that so much of it is tied to the share price, morale in the team must be at an all-time low. Most executives that are left, are eyeing up the door.

This is all the more pertinent because it comes at a time when Robinhood is cutting back on the size of its workforce.

HOOD Stock Valuation – Still Overvalued

Data by YCharts

The strongest bull case that an investor can bring to the table is that Robinhood was priced at more than 5x next year’s revenues only a few months ago, therefore now that it’s around 3x next year’s revenues, it must be undervalued.

The problem with valuations is that even if that assertion was correct, and we were to pretend that Robinhood was undervalued, something that I don’t believe to be valid at all, even if that was correct, companies go from overvalued to undervalued all the time.

It’s rare that a company would stop its swing in valuation at precisely the correct level of valuation. Said another way, valuations tend to overshoot on the upside and the downside.

And I don’t see enough here in these latest set of results to put a floor on Robinhood’s stock. The business is struggling to ignite its revenue growth, it’s still seriously unprofitable, its users’ growth rates are not showing any promise, and the stock is still richly valued at approximately 3x next year’s revenues.

The Bottom Line

The most bullish consideration anyone can bring to the table is that the stock has fallen so significantly in value, that it ‘must’ now be undervalued.

As an investor that has in the past fallen prey to that line of thinking, as we all have at some point in our careers, allow me to tell you that just because something has fallen in value, it is not now a deep value stock.

In the environment that we find ourselves in right now, with so many businesses that are making strong cash flows that are seriously cheaply priced, I make the case that readers should consider those names, rather than ”hoping” that Robinhood finds a way to grow its revenues higher. Whatever you decide, good luck and happy investing.