Robinhood Stock: With Crypto Down, This Will Be Tough (NASDAQ:HOOD)

Investment Thesis

Robinhood (NASDAQ:HOOD) has seen its shares rally since the summer lows of $7 per share as investors believe that Robinhood’s restructuring plan will be enough to right this ship.

Yet, I remain bearish.

I believe that the recent downward moves in crypto will further weigh on investors’ appetite to transact on Robinhood’s platform. This is contrary to Robinhood’s recent commentary.

As Robinhood’s brokerage customers have fewer crypto transactions, this will lead to weaker revenues in the near-term, thereby leading to Robinhood’s Q4 2022 missing analysts’ estimates.

In short, avoid this name.

Robinhood’s August Figures, Here’s the Good News

For the month of August, Robinhood’s cumulative net deposits were up 26% y/y. This coincided with the market rallying since the summer lows.

As a proxy for retail interest in stocks, I have used ARK (ARKK). As you can see above, from early July into the middle of August ARKK was up 50% over those two months before selling off at the end of August.

Hence, I believe that’s very positive for Robinhood’s Q3 results. And that’s led to a short-term bounce in HOOD as investors sought to buy the dip in this name.

But I don’t believe that’s lasting value in this recent pop.

I believe that the recent pop in its share price will soon turn lower, as investors look beyond Q3 and into Q4 2022.

Robinhood’s Q4 Results Will be Weak

As you can see above, back in Q4 2020, approximately two years ago, Robinhood’s revenues from crypto were largely insignificant as proportion of total revenues.

And when we compare Robinhood’s exposure to crypto in Q4 2021, $48 million out of its $264 million of total revenue was derived from crypto revenues (see slide 24).

Consequently, since the crypto market continues to trend lower, there’s a significant overhanging risk to Robinhood’s Q4 revenues.

Accordingly, I believe that it’s very likely that as Robinhood enters into Q4 2022, next month, Robinhood’s revenues from crypto will dip lower so that Q4 2022 will report less than $30 million in revenues in the quarter.

Thus, when Robinhood reports its Q4 2022 results early in 2023, investors will be in for a negative surprise.

HOOD Stock Valuation – 6x 2022 Revenues

Robinhood is still priced at 6x this year’s revenues. Given that this market is becoming increasingly selective of where value is, I don’t believe that paying 6x this year’s revenues for Robinhood, a business with such poor visibility, is a good investment.

When I look around at my different available opportunities, I see countless high-quality businesses with long runways being priced at 6x sales.

For instance, within cybersecurity or enterprise software companies, there are many businesses that have many fortune 500 companies as their customers. Not retail investors facing a cost of living crisis.

What’s more, those compelling businesses are growing at rapid rates and are either already profitable or have a clear path to profitability. And they are getting priced at 6x sales!

Hence, why would investors risk paying 6x sales for Robinhood?

Earnestly, I believe that is an investment with a poor risk-reward profile.

The Bottom Line

Ever since Robinhood IPO’d, it appears to have hit one rough patch after another. As we now enter a “new bear market”, I find it difficult to be bullish on this company’s prospects.

Particularly, I focus my bearish investment thesis not so much on Robinhood’s Q3 2022 results, which I believe, as discussed above, could positively surprise the investment community but on Robinhood’s Q4 2022, when I believe that investors’ appetite for trading crypto on the Robinhood platform could be significantly reduced.

Even though the share price is down so significantly, at more than 70% since its IPO, I still find little value on offer for new investors coming to this stock.