Robinhood Stock Has Plunged 89% — Here’s Why It Will Keep Falling
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NEW YORK, NEW YORK – JULY 29: Baiju Bhatt (right) and Vlad Tenev, founders of the online brokerage … [+]
About a year ago, Robinhood Markets stock traded at $85 a share. Since then, 89% of that value has vanished. And on August 2, Robinhood announced second quarter results that included canning 23% of its workforce, according to Wall Street Journal.
Will Robinhood stock —11.8% of its shares are sold short, according to the Journal— lose its remaining $9.45? Here are three reasons it could:
- Burning through cash
- Missing growth catalyst
- More regulatory woes
Disappointing Q2 Results
After it reported second quarter results, Robinhood stock lost 2% of its value on the back of disappointing revenue, a loss in monthly active users, and its intention to cut 23% of its employees, reported CNBC.
Here are the details:
- Revenue of $318 million was down 44% — $3 million short of consensus
- Monthly active users fell 34% to 14 million,
- Customers’ trading activity declined 55% to $202 million, and
- Headcount to drop 23% — costing about 1,300 people in operations, marketing and program management their jobs.
Robinhood CEO Vlad Tenev blamed factors outside his control. These included “deterioration of the macro environment, with inflation at 40-year highs accompanied by a broad crypto market crash.”
To be fair, Tenev took responsibility for hiring too many people. He told employees that Robinhood’s April layoffs — cutting 9% of its workforce — did not go far enough. “our ambitious staffing trajectory — [based on the assumption that heightened 2021 retail engagement in stocks and crypto would continue] is on me.”
Burning through cash
I do not know whether Robinhood has enough cash to make it through the next year.
To be sure, it had nearly $6 billion in cash at the end of June, according to its second quarter report. Sadly, during the second quarter, its operations consumed about $1.3 billion in cash.
With all the layoffs pending in this quarter, there is likely to be a significant amount of cash consumed by severance costs (Robinhood estimates restructuring charges in range of $45 million to $60 million). If on average Robinhood operations burned through $1.5 billion in cash a quarter, its $6 billion in balance sheet cash would be gone within a year.
In theory, there are many ways Robinhood could raise more cash. It could sell some of its assets, it could borrow, it could raise equity in a private placement, or it could try to sell shares to the public.
However, absent a compelling reason why Robinhood’s revenues will grow, it is unclear why investors will supply the cash.
Missing growth catalyst
And it seems to me that there is little reason for that to occur.
To be fair, Robinhood is optimistic about its prospects as a standalone entity. As CFO
Robinhood has launched a new debit card and plans to “roll out tax-advantaged retirement accounts later this year,” according to the Journal, which wrote that “some former employees, customers and analysts, have criticized the brokerage for being too slow to unveil new products.”
If Robinhood can convince investors that these new products will reverse its sliding revenues and customer counts, perhaps Warnick’s optimism would be justified.
However, I find it far more telling that Robinhood declined to provide revenue forecast for the current quarter. Instead, it provided guidance on how much it will cut costs — in the range of “25% to 29% from the prior year,” according to its second quarter report.
More regulatory woes
Regulators have their eyes on Robinhood. As the Journal wrote, “The New York State Department of Financial Services said Tuesday that it imposed a $30 million fine on Robinhood’s cryptocurrency trading unit for alleged violations of anti-money-laundering and cybersecurity regulations.”
Meanwhile, SEC Chair Gary Gensler could eliminate one of its revenue streams. Earlier in 2022, he “outlined a revamp of trading rules that could threaten one of the key ways Robinhood makes money,” noted the Journal.
Robinhood has misfired many times before. For example, in January 2021 it caused customer outrage for restricting their ability to buy shares in GameStop. Tenev faced lawmakers who raised questions about the fairness of financial markets,
And “the platform has also faced criticism for exposing amateurs to risky products such as meme stocks – shares which become popular via social media – and cryptocurrencies,” according to the BBC.
Having said that, Robinhood could be an attractive acquisition candidate for a larger firm seeking to build up its base of GenZ consumers. However, its dual class stock ownership means that a hostile takeover would not work.
All hope is not lost for Robinhood bulls. That’s because crypto could rise from the ashes. After all, between November 2021 and mid-June 2022, bitcoin lost some 71% of its value after peaking in November 2021 and then plunging to about $19,000 in mid-June.
Since then, Bitcoin
If you’re confused, consider Cory Klippsten — who criticized the digital coin Luna and the crypto bank Celsius Networks before they collapsed — but runs his own crypto shop.
Even as he criticizes rivals, he has been dollar cost averaging in Bitcoin every day — continuing throughout the downturn. If he received a huge profit from his investing — he would seek to persuade his wife to put “the majority of it” back into Bitcoin, he told the Times.
If there are enough maxis out there — or people who decide to follow them — perhaps now is a great time to pick up Robinhood stock at a discount.
Or they could buy their crypto at another brokerage with a more solid financial footing.
Ben Gordon, Managing Partner and CEO of Cambridge Capital and BGSA, has been betting that Robinhood stock will go down. As he told me August 3, “It seems like a terrible company! I am holding on to my short position. Why? I agree with all of your points. Plus dependence on trading meme stocks. And customers who hate them.”
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NEW YORK, NEW YORK – JULY 29: Baiju Bhatt (right) and Vlad Tenev, founders of the online brokerage … [+]
About a year ago, Robinhood Markets stock traded at $85 a share. Since then, 89% of that value has vanished. And on August 2, Robinhood announced second quarter results that included canning 23% of its workforce, according to Wall Street Journal.
Will Robinhood stock —11.8% of its shares are sold short, according to the Journal— lose its remaining $9.45? Here are three reasons it could:
- Burning through cash
- Missing growth catalyst
- More regulatory woes
Disappointing Q2 Results
After it reported second quarter results, Robinhood stock lost 2% of its value on the back of disappointing revenue, a loss in monthly active users, and its intention to cut 23% of its employees, reported CNBC.
Here are the details:
- Revenue of $318 million was down 44% — $3 million short of consensus
- Monthly active users fell 34% to 14 million,
- Customers’ trading activity declined 55% to $202 million, and
- Headcount to drop 23% — costing about 1,300 people in operations, marketing and program management their jobs.
Robinhood CEO Vlad Tenev blamed factors outside his control. These included “deterioration of the macro environment, with inflation at 40-year highs accompanied by a broad crypto market crash.”
To be fair, Tenev took responsibility for hiring too many people. He told employees that Robinhood’s April layoffs — cutting 9% of its workforce — did not go far enough. “our ambitious staffing trajectory — [based on the assumption that heightened 2021 retail engagement in stocks and crypto would continue] is on me.”
Burning through cash
I do not know whether Robinhood has enough cash to make it through the next year.
To be sure, it had nearly $6 billion in cash at the end of June, according to its second quarter report. Sadly, during the second quarter, its operations consumed about $1.3 billion in cash.
With all the layoffs pending in this quarter, there is likely to be a significant amount of cash consumed by severance costs (Robinhood estimates restructuring charges in range of $45 million to $60 million). If on average Robinhood operations burned through $1.5 billion in cash a quarter, its $6 billion in balance sheet cash would be gone within a year.
In theory, there are many ways Robinhood could raise more cash. It could sell some of its assets, it could borrow, it could raise equity in a private placement, or it could try to sell shares to the public.
However, absent a compelling reason why Robinhood’s revenues will grow, it is unclear why investors will supply the cash.
Missing growth catalyst
And it seems to me that there is little reason for that to occur.
To be fair, Robinhood is optimistic about its prospects as a standalone entity. As CFO
Robinhood has launched a new debit card and plans to “roll out tax-advantaged retirement accounts later this year,” according to the Journal, which wrote that “some former employees, customers and analysts, have criticized the brokerage for being too slow to unveil new products.”
If Robinhood can convince investors that these new products will reverse its sliding revenues and customer counts, perhaps Warnick’s optimism would be justified.
However, I find it far more telling that Robinhood declined to provide revenue forecast for the current quarter. Instead, it provided guidance on how much it will cut costs — in the range of “25% to 29% from the prior year,” according to its second quarter report.
More regulatory woes
Regulators have their eyes on Robinhood. As the Journal wrote, “The New York State Department of Financial Services said Tuesday that it imposed a $30 million fine on Robinhood’s cryptocurrency trading unit for alleged violations of anti-money-laundering and cybersecurity regulations.”
Meanwhile, SEC Chair Gary Gensler could eliminate one of its revenue streams. Earlier in 2022, he “outlined a revamp of trading rules that could threaten one of the key ways Robinhood makes money,” noted the Journal.
Robinhood has misfired many times before. For example, in January 2021 it caused customer outrage for restricting their ability to buy shares in GameStop. Tenev faced lawmakers who raised questions about the fairness of financial markets,
And “the platform has also faced criticism for exposing amateurs to risky products such as meme stocks – shares which become popular via social media – and cryptocurrencies,” according to the BBC.
Having said that, Robinhood could be an attractive acquisition candidate for a larger firm seeking to build up its base of GenZ consumers. However, its dual class stock ownership means that a hostile takeover would not work.
All hope is not lost for Robinhood bulls. That’s because crypto could rise from the ashes. After all, between November 2021 and mid-June 2022, bitcoin lost some 71% of its value after peaking in November 2021 and then plunging to about $19,000 in mid-June.
Since then, Bitcoin
If you’re confused, consider Cory Klippsten — who criticized the digital coin Luna and the crypto bank Celsius Networks before they collapsed — but runs his own crypto shop.
Even as he criticizes rivals, he has been dollar cost averaging in Bitcoin every day — continuing throughout the downturn. If he received a huge profit from his investing — he would seek to persuade his wife to put “the majority of it” back into Bitcoin, he told the Times.
If there are enough maxis out there — or people who decide to follow them — perhaps now is a great time to pick up Robinhood stock at a discount.
Or they could buy their crypto at another brokerage with a more solid financial footing.
Ben Gordon, Managing Partner and CEO of Cambridge Capital and BGSA, has been betting that Robinhood stock will go down. As he told me August 3, “It seems like a terrible company! I am holding on to my short position. Why? I agree with all of your points. Plus dependence on trading meme stocks. And customers who hate them.”
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