Robinhood Stock Forecast & Analysis: Is HOOD a Buy?

Written by Sean GraytokUpdated: 8th May 2022
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Robinhood stock has struggled since its public debut in 2021. But more than 80% off its highs, has HOOD reached deep value territory?

Let’s find out in this Robinhood stock forecast and analysis.

Robinhood Stock: Background

Robinhood is the most popular trading platform on the market. It was founded in 2013 by Vlad Tenev and Baiju Bhatt and revolutionized the financial industry by offering commission-free trading.

Today, it is the most popular free app in the Apple App Store and has millions of daily users.

The term “Robinhood Trader” has become synonymous with the “retail investor”. The company markets its services to retail investors by offering the following:

  • No Account Minimums
  • Zero Commissions
  • Fractional Shares
  • Easy Sign-up Process
  • Crypto
  • Easy Access to Margin
  • A fantastic user-interface

It’s no wonder why the platform’s popularity is soaring — but this spotlight has come with its fair share of controversy.

Controversy aside, let’s examine the investment potential in the business. 

Robinhood Stock: Investment Potential

#1. The Facebook of Trading

The Robinhood trading platform is “free” to the user because the user is the product.

Like Facebookand Google, Robinhood realized the value of data in our increasingly digital world. In Robinhood’s case, the data was order flow from retail investors.

Harvesting and selling this information allowed Vlad to flip the traditional brokerage model on its head and make it more attractive to the end-user, at least on the surface.

So, why does this approach work so well? Robinhood leverages a unique dynamic between its end-users and its actual customers.

Robinhood is enticing to the end-user because it is free, contributing to the platform’s adoption and virality.

This allows Robinhood to grow a large user base, which results in more data for Robinhood’s real customers: market makers and high-frequency trading (HFT) firms with large wallets.

This is why we see similarities between Facebook and Robinhood. Facebook users create the platform’s value (search data and behavior) that is then sold back to them by advertisers.

Robinhood users create the platform’s value (buy and sell data) that is collected and sold to front-running hedge funds.

Just because a product is free from a monetary perspective does not mean it comes without costs.

#2. Payment For Order Flow Pays

Order flow data is extremely valuable — market makers and HFTs are willing to pay exorbitant amounts of money to get their hands on it.

Robinhood has changed the way it refers to “Payment For Order Flow”, now calling it transaction-based revenue. Here’s a breakdown of that revenue segment from the recent quarter:

  • Options: $163 million, up 14% year-over-year
  • Cryptocurrencies: $48 million, up 304% year-over-year
  • Equities: $52 million, down 35%  year-over-year

Transaction-based revenues are slowing in the options and equities space, but crypto is holding strong. 

#3. The Rise of Crypto

Robinhood is turning into a sneaky crypto play. The company revealed that 9.5 million users traded cryptocurrency on its platform in Q1’21.

Few trading platforms allow users to buy both stocks and bitcoin. And while Robinhood does not allow users to transfer their crypto off-platform, it still benefits from the crypto boom.

In addition to collecting a trading fee on crypto transactions, Robinhood captures the spread on the bid-ask, sometimes as high as 2%.

Cryptocurrency as an asset class is still extremely small — it’s just north of $2 trillion in total.

Robinhood will benefit from the rise of this young asset class and its seemingly endless application potentials.

#4. Increasing Adoption

Robinhood benefits from a first-mover advantage: it was the first platform to offer commission-free trading and market itself to the retail investor.

While it took some time to gain traction, the company now has a user base estimated to be 20 million.

It is the number one free app in the Apple App Store, ahead of Coinbase, TikTok, YouTube, Instagram, and well… every other free app.

The mobile app launched just six years ago, and Robinhood is already clipping at the heels of Vanguard and Charles Schwab in terms of number of users, which each has approximately 31 million accounts.

Robinhood’s adoption is fueled by word-of-mouth marketing and network effects. New investors are using Robinhood because that’s what their friends are using — and to buy meme stocks

Robinhood Stock Moat

Plain and simple, Robinhood has a superior product — its simple user interface makes the entire trading process frictionless.

Users can create an account and be investing within minutes. This is accomplished via “Instant Deposits” that allow users to trade prior to Robinhood receiving the actual funds.

While other fintech companies can create sleek UIs, they probably cannot display it to such a large user base.

Robinhood enjoys its first-mover advantage amongst commission-free trading platforms. And rightfully so — disrupting the traditional financial industry is no small task.

In addition, Robinhood moves fast. From fractional shares to crypto and now retail IPO participation, the company’s culture reminds us of Facebook’s old mantra, “Move Fast and Break Things”.

Robinhood Stock Analysis: Q4 Earnings

Robinhood reported earnings on January 27, 2022. Here are the highlights:

  • Loss per share: 49 cents vs 45 cents estimated
  • Total revenue: $363 million, up 14 year-over-year
  • Net Loss: $423 million 

Shares fell as much as 14% in the next trading day, then rallied about 10% in the same day. 

What else would you expect with this stock?

The company also announced weaker-than-expected guidance for the coming quarter, forecasting first-quarter revenue of less than $340 million, down 35% compared to 2021. 

Robinhood Stock Competition

Robinhood forced the other legacy brokers to follow suit and offer commission-free trading. Robinhood disrupted an industry that was impervious to incumbents for decades.

However, the tables have turned, and now companies are gunning for Robinhood. Let’s look at Robinhood’s top competitors:

  • Charles Schwab (SCHW)
  • Morningstar (MORN)
  • SoFi (IPOE)
  • TD Ameritrade (AMTD)
  • Interactive Brokers Group (IBKR)
  • e*TRADE Financial (ETFC)

Robinhood’s foray into crypto welcomes another roster of competition:

  • Coinbase (COIN)
  • Gemini
  • BlockFi
  • Kraken

As you can see, there’s no shortage of competition in the fintech space.

Robinhood Stock Bear Case

#1. Retail Investing Slows

The pandemic fueled the rise of retail investors; individuals were forced to stay inside and find new ways to spend their time. For many, it was the stock market — and Robinhood was the platform of choice.

Robinhood’s frictionless sign-up process and user interface made it the default choice for new investors. But it experienced years’ worth of growth within a short window of time.

The bearish perspective is that this influx of capital comes from individuals who will find a new hobby once they get tired of stocks and coins.

Remember, Robinhood makes money by selling order flow. If that rate of flow decreases, so too does the company’s bottom line.

#2. Concentrated Revenues from PFOF

Speaking of order flow… PFOF represents a majority of Robinhood’s revenue. For the sake of clarity, let’s look at the ways that Robinhood makes money:

  • Gold Accounts at $5 per month (extra benefits)
  • Net Interest Income
  • Margin Fees
  • Securities Lending
  • Interchange Fees via the Robinhood Debit Card
  • Payment for Order Flow (PFOF)

Robinhood was vilified once its users realized that they were the product (no free lunch), but PFOF is a necessary part of the market.

Market makers and high-frequency traders connect buyers and sellers via this order flow. These intermediaries provide liquidity and depth to markets that allow them to function so efficiently.

Granted, HFTs aren’t doing this out of the goodness of their heart: they profit from the difference in the bid-ask spread and front-run trades.

Regardless, Robinhood relies heavily on this portion of its business. Some say, a little too much.

Robinhood Stock Allocation in Your Portfolio

It’s important to consider both micro and macro trends when determining how much of a stock to buy, in addition to your investing goals and time horizon.

The following questions serve as a thought experiment for deciding how much Robinhood stock to buy, if any:

  • Will the retail investor stick with Robinhood in the long term?
  • Can Robinhood diversify its revenue stream beyond PFOF?
  • Can Robinhood fend off competition from disruptor platforms?
  • Can Robinhood sustain its rate of innovation, or will it be slowed by regulation?
  • Has Robinhood taken the necessary steps to prevent another GameStop incident?
  • Will Robinhood’s decision to dial back the “gamification” of investing hurt its bottom line?
  • Has Robinhood’s valuation increased too quickly due to pandemic-related tailwinds?
  • At what price are you buying in the hopes of an acquisition?

These questions are designed to analyze Robinhood’s long-term investment potential and market position.

Robinhood Stock: FAQs

How much is Robinhood stock?

Robinhood stock is down significantly since its public offering, as much as 80% off its highs of $85 per share. 

Is HOOD a buy today?

HOOD is a buy today if you think the company can execute on its growth objectives and navigate the financial minefield effectively. If you’re a long-term believer in HOOD then 80% off its highs is a great buying opportunity. 

Bottom Line: Robinhood Stock Forecast

The Disruptors and The Disrupted are coming for Robinhood — it will be interesting to watch how Robinhood handles challengers from both ends of the financial industry.

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This article is for informational purposes only, and it is not intended to be investment advice. Read our editorial guidelines and public equities research methodology to learn more about how we researched Robinhood (HOOD) stock.

Sean Graytok
Sean Graytok

Sean Graytok is our Co-Founder and is a recognized expert in investing, financial management, and Bitcoin. His work has been cited in leading industry publications, such as InvestorPlace and Business Insider. Sean is interested in the people and companies who are driving technological innovation.