Analysis-Robinhood shares stumble as trading frenzy wanes, regulators
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[January 27, 2022] By
Hannah Lang
(Reuters) - Robinhood Markets Inc became a
household name ahead of its stellar IPO last year, when retail investors
used its trading app to drive shares of GameStop and other "meme stocks"
into the stratosphere, but name recognition has not helped its share
price lately.
“The market is not being very patient with them,” said Greg Martin,
co-founder and managing director at Rainmaker Securities, a brokerage
specializing in private company deals.
Waning investor interest in retail trading has weighed on shares of the
commission-free online brokerage, which saw explosive growth at the
beginning of 2021 as retail investors gobbled up viral stocks
https://www.reuters.com/article/us-
retail-trading-robinhood-anger/robinhood-is-new-eye-of-gamestop-storm-as-outrage-grows-idUSKBN29X33D
including GameStop and AMC Entertainment. Robinhood's monthly active
users jumped from 11.7 million at the end of 2020 to 21.3 million at the
end of June 2021.
California-based Robinhood achieved a valuation of $31.8 billion on its
initial public offeringhttps://www.reuters.com/business/
finance/
robinhood-gateway-meme-stocks-raises-21-billion-ipo-source-2021-07-28 in
July. But it has slumped since then, and closed Wednesday down 85% from
its 52-week high.
![](http://archives.lincolndailynews.com/2022/Jan/27/images/ads/current/stclara_lda_SPONSOR_090519.png)
In addition to smaller trading volumes, analysts cited regulatory
scrutiny of Robinhood’s main source of revenue: order flow it sells to
market makers.
“They've got a global brand, which they basically did with zero
marketing. Now, they need to create more long-lasting revenue streams
that are more sustainable," said Martin.
One analyst said Robinhood needs to find a way to get its share price up
or it could become a takeover target.
Robinhood declined to comment, but has said it continues to gain
customers as it adds new products and features, and expects that trend
to continue. The company, which offers stock, options and cryptocurrency
trading, is due to report fourth-quarter earnings on Thursday afternoon.
Like many tech start-ups, Robinhood has yet to turn a profit as a public
company. Its two quarters
https://www.reuters.com/technology/
robinhood-revenue-more-than-doubles-crypto-trading-boom-2021-08-18 of
results have so far disappointed investors.
Robinhood's modest gains in revenue have been driven largely by a surge
in crypto trading in the second quarter. Stock trading activity has
eased from peaks during last year's trading frenzy, partly offset by a
rise in options volumes.
Robinhood's average revenue per user swooned to $65 in the third quarter
from $137 in the first quarter of 2021.
Analysts agree the company must expand its offerings to survive in a
crowded space, especially if U.S. stock prices fall further from record
highs as expected with the Federal Reserve preparing to raise interest
rates
https://www.reuters.com/business/finance/
inflation-fighting-fed-likely-flag-march-interest-rate-hike-2022-01-26.
Chaim Siegel, founder and head of U.S. equity research at Elazar
Advisors, called rising interest rates a key threat.
“So many high-flying, no earnings or low-earnings companies have just
been hit very hard in the last two months,” said Siegel, who downgraded
Robinhood to neutral in August.
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![](../images/012722pics/busine63.jpg)
Employees of Robinhood Markets, Inc., attend their company’s IPO
outside the Nasdaq Market site in Times Square in New York City,
U.S., July 29, 2021. REUTERS/Brendan McDermid/File Photo
![](http://archives.lincolndailynews.com/2022/Jan/27/images/ads/current/graue_21BLAZER_081621.png)
Last week, investors sold stocks as they grappled with changing Fed policies and
tension between Russia and Ukraine. Wall Street posted its biggest weekly
decline
https://www.reuters.com/markets/europe
/global-markets-wrapup-1-2022-01-26 since early in the pandemic in March of
2020.
Rising interest rates will probably push investors into safer assets, and many
could cut positions in stocks or crypto. That could mean less trading for retail
investors, the core of Robinhood’s customer base.
"A ton of them are going to lose money, then lose interest,” said Jeff Tomasulo,
chief executive officer of Vespula Capital Management.
Retail trading volume peaked in January 2021, making up nearly 27% of U.S. stock
trading volume, according to Securities and Exchange Commission (SEC) data. By
November, retail trading volume had declined to 21.42% of total market volume.
SEC CRACKDOWN
The U.S. Securities and Exchange Commission (SEC) is considering whether to
reform or even ban payment for order flow (PFOF), whereby brokers route trades
to wholesale market makers in return for a fee.
Robinhood derived nearly 75% of its revenue from PFOF and other transaction
rebates in the third quarter of 2021.
It has said it does not expect the SEC to ban the practice, but expressed
confidence it could find other ways to generate revenue, possibly executing
client orders internally.
Still, the threat of an SEC crackdown is an "overhang" for the stock, said
Martin of Rainmaker Securities.
Looking to expand its revenue stream beyond transactions, Robinhood now offers
customers the opportunity to buy into IPOs. It has been testing a wealth
management tool and has talked about offering retirement accounts.
Robinhood shareholders are probably looking for the company to limit its
spending, said Siegel, which would make it harder to offer new products. The
company also must deal with fines stemming from the meme stock frenzy last year.
![](http://archives.lincolndailynews.com/2022/Jan/27/images/ads/current/LPL_small%201.gif)
Robinhood's legal expenses jumped from
https://www.reuters.com/technology/
regulatory-legal-headwinds-facing-
robinhood-2021-07-02 $1.4 million in 2019 to $105 million in 2020, according to
its IPO filing. Other financial firms
https://www.reuters.com/markets/us/
big-us-banks-see-higher-expenses-workers-rising-wages-2022-01-19 have also been
pinched by upward pressure on labor costs.
Tomasulo said it remains to be seen if the market will be patient.
“There's not many brokers out there like Robinhood, so I can see as Robinhood
gets cheaper and cheaper, this becomes a really good takeover target."
(Reporting by Hannah Lang in Washington; additional reporting by John McCrank;
editing by Michelle Price and David Gregorio)
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