Robinhood Is Acquitting Itself Well Despite the Naysayers
As a FINRA-regulated broker, Robinhood Markets Inc. (NASDAQ:HOOD) offers commission-free trades of stocks, ETFs and cryptocurrencies, enabling millions of users to access crypto wallets. It became hugely popular in recent years due to the ease of use of its mobile app.
Despite its popularity, Robinhood Markets has struggled recently due to external market fluctuations and increasing competition from other financial services companies.
Nonetheless, the company remains a leader in the industry and is committed to providing high-quality service for investors of all backgrounds and expertise levels. Even as naysayers claim that the stock will never recover from the Covid boom and bust as competitors rush to offer commission-free trades, Robinhood demonstrated its ability well in the third quarter, outpacing analyst estimates and giving investors plenty of reasons to remain positive amid a gloomy market.
Robinhood's strengths
Robinhood has seen incredible success in recent years, largely thanks to the growing popularity of e-trading. Between August 2021 and August 2022, e-trading saw a massive 400% increase in users' account balances, meaning this trading method is increasingly attractive for investors. Despite macroeconomic headwinds putting a damper on interest in investing, Robinhood continues to surge forward as a leading e-trading platform by offering innovative features and tools that keep customers coming back for more.
The average age of Robinhood's customer base is 31 years old, which means the company is more accessible for younger investors looking at options outside traditional Wall Street stocks and bonds. Unlike some of its rivals, the company offers a platform that is very appealing to a younger (and larger) market.
The Robinhood app has been getting better with each passing day as well. For example, in October, the company began allowing instant withdrawals for their users, which might seem attractive to new customers looking for an easy way into stock investing without having too much hassle.
With this unbeatable combination of accessibility and reliability, Robinhood could be poised for even greater success in the years to come in my opinion. The stock, though, will likely remain under pressure in the near-term due to the broader economic downturn.
Robinhood passes a key test with third-quarter earnings
Robinhood recently announced better-than-expected third-quarter results, with a net loss of just $0.20 per share and revenue of $361 million. This represented a significant improvement from the previous quarter, highlighting the company's ability to survive in a difficult market. Robinhood's adjusted Ebitda was also positive in the third quarter, coming in at a $47 million compared to a loss of $80 million in the previous quarter.
It's worth noting that there was a steep drop in active monthly users from a high of 21.3 million in the second quarter of 2021 to 12.2 million in the third quarter of 2022. This is where the big bear case against the stock is coming from.
A significant amount of the company's revenue comes from the crypto segment, which is even more sensitive to the effects of short-term traders than the broader stock market. Crypto-based revenues are highly vulnerable to changes in the cryptocurrency market, which is down substantially this year.
Robinhood's cash balance significantly declined in the third quarter, dropping by $200 million to end the quarter at just $6 billion.
Overall, though, I believe the third quarter earnings report is much-needed light at the end of the tunnel, offering reassurance that Robinhood remains on track for long-term success despite current challenges. With so many question marks hanging over the markets right now, it has never been more important to pay close attention to the companies you follow and their next moves.
Clamping down on costs
Given the recent launch of cost reduction initiatives at Robinhood, the company has released updated guidance for its full fiscal 2022. With these initiatives, the company expects a significant decline in operating expenses in the range of 31% to 32%.
Robinhood has also revised its outlook for share-based compensation, projecting a decline of 56% to 59% year over year compared to previous years. Furthermore, the total operating expense before accounting for share-based compensation is expected to decline by 9% to 10%.
In April 2022, the company announced layoffs of 9% of its employees, including its chief product officer. Two months later, Robinhood announced another round of cuts, a 23% reduction in its workforce. On Sept. 30, Robinhood announced that it would be closing five offices as part of ongoing efforts to restructure and streamline operations.
Even with these aggressive cost reduction efforts, Robinhood shows no sign of slowing down as the company continues to push the boundaries of innovation in the e-trading industry. This gives me hope for the company's long-term potential.
Takeaway
Robinhood has grown rapidly over the past few years. However, the volatile stock market, especially the cryptocurrency market, has dealt Robinhood several blows, with its crypto revenue declining significantly. It is also facing renewed competition from other players after its brief stint as the only one offering zero-commission trades.
Robinhood is attempting to stay ahead of the curve by targeting a broader consumer base with an expanded range of products and services. Despite the challenges, Robinhood still has considerable potential to grow and become a successful company in the long run. Ultimately, I think Robinhood's third-quarter earnings are excellent given the circumstances.
But it is important to consider how this performance compares to the past as well as the general economic condition. When we factor in all the variables, I believe it could be a while before Robinhood the stock makes a comeback.
This article first appeared on GuruFocus.
