Robinhood stock price prediction: can it bounce back to $20? (NASDAQ: HOOD)

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Robin Hood (NASDAQ: HOOD) has been on a direct downward trajectory since its post-IPO surge. The once-meme action is now a victim of the bursting of the tech bubble. The fall in stock prices was also fueled by fundamental factors, such as the company saw both its growth — and earnings — evaporate quickly after its IPO. While the short-term future certainly looks murky, the price is right for those optimistic for a rebound.

CAPOT stock price

HOOD went public last summer at $38 per share, briefly peaked at $85 per share and has since fallen 88%.

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Data by YCharts

I last hedged the stock in March, and the stock has since fallen 10%. There, I weighed the struggling finances against the great cash hoard. The fundamentals continue to deteriorate, although this may be due to current market conditions.

HOOD Stock Key Metrics

The first quarters since its IPO have shown strong growth. These turned out to be the high point, as the company has since posted three straight quarters of dramatic sequential declines.

net income

Robinhood 2022 Q1 Overview

Profitability fell in parallel. The company saw its net loss narrow to “just” $392 million, but the year-ago quarter had a positive net profit of $47 million after adjusting for non-cash changes in the fair value of its bonds convertibles and its warrants.

net loss

Robinhood 2022 Q1 Overview

Perhaps looking at the Adjusted EBITDA trend provides a clearer picture. We can see the company was generating strong Adjusted EBITDA margins in 2020 and early 2021, before seeing margins deteriorate from the second half of 2021.

Adjusted EBITDA

Robinhood 2022 Q1 Overview

Since Adjusted EBITDA cancels out stock-based compensation, this means that even when accounting for stock dilution, the company is still burning cash.

Is Robinhood losing or gaining customers?

These struggling fundamentals are largely due to the company’s deteriorating user base. The combined net consolidated accounts showed a slight sequential growth.

net funded accounts

Robinhood 2022 Q1 Overview

But that’s arguably not the right metric here, as HOOD’s business model is highly transaction-dependent. Monthly active users continued to decline rapidly.

MAU

Robinhood 2022 Q1 Overview

To compound the pain, the average revenue per user has also declined.

ARPU

Robinhood 2022 Q1 Overview

It seems that the upside volatility caused trading to increase, but the downside volatility did the opposite.

Is Robinhood Stock a good long-term choice?

Wall Street analysts don’t hold out much hope for the stock. The average rating is only 3.4 out of 5.

Wall Street Ratings

Looking for Alpha

The average price target of $13.60 per share represents a 40% upside from current levels.

target price

Looking for Alpha

Given the speculative nature of the stock, this does not present any attractive upside potential. Also, if HOOD continues to lose MAUs, it will continue to burn money, and at some point it might even burn all available money. Unless the fundamentals improve, this is a stock that may worsen over the long term.

Will Robinhood’s stock ever recover?

However, this forecast may be too pessimistic. It is difficult to measure the tangible impact on the company’s reputation during the GameStop (GME) and AMC (AMC) fiasco. However, it should be remembered that HOOD offered much more than commission-free transactions. The platform was popular largely because it made trading easy, fun, and exciting. It gets a bad rap these days, but investing is boring enough for ordinary people, and HOOD has no doubt helped make progress in changing that.

There are countless companies in the recent past that have suffered reputational blows but still recovered – perhaps the most notable is Apple (AAPL), which has fully recovered from the infamous iCloud hacks. At the time, it looked like the company was in deep trouble and no one would trust its iCloud service going forward. It clearly didn’t work, and iCloud is arguably the company’s most attractive growth segment. HOOD could experience a similar recovery.

Wall Street consensus estimates predict a return to growth next year, as shown below:

consensus estimate

Looking for Alpha

Is HOOD stock a buy, sell or hold?

Even if growth is not as aggressive as Wall Street expects, this stock looks cheap here. The stock is trading at 6 times forward sales. The $6.3 billion in net cash represents 70% of the current market capitalization. The company operates at an annualized run rate of negative net income of $1.6 billion, which means that including dilution, the company can sustain nearly four years of losses. I can see the company earning at least 30% net margin over the long term. If we then assume that the company can return to a 20% growth rate, then the stock is currently trading at around 1x the price to earnings growth ratio (“PEG ratio”) using this margin assumption. – and that’s before taking into account the big net cash. I could see the stock trading at a PEG ratio of 1.5x, suggesting a 50% upside multiple expansion, again before factoring in net cash. If HOOD can return to growth and cut losses more quickly, net cash can help boost potential returns. The risks of this thesis are numerous. HOOD may not be able to repair the damage to its reputation and return to user growth. HOOD could also face an existential crisis: it derives the majority of its revenue from payment for order feeds, a practice that has been controversial. HOOD would likely have to change its business model if order flow payment was prohibited. In my view, the stock price is attractive for a bullish reversal, with enough cash on the balance sheet to buy the time for such a reversal. I rate the stock as a buy, but emphasize the speculative nature of this thesis which should be considered when evaluating such a position.

Karen J. Nelson