Robinhood shares are down 13% this week. Here’s why I’m not keen to invest

When Robinhood (NASDAQ:HOOD) went public back in July, there was huge optimism and excitement about the business. From an IPO price of $38, it rallied to over $55 in early August. Unfortunately, things haven’t been as positive in recent weeks. In fact, after some disappointing earnings, Robinhood shares are down 13% this week to trade at $35. Here’s why I think the price could fall even lower.

Poor results hit Robinhood shares

To begin with, let’s take a look at the latest report. Total net revenue came in at $365m for Q3, which was up 35% year-on-year. Yet Q2 revenue was at $565m, so around a 36% drop was seen in the latest quarter. When looking for reasons, crypto trading was flagged up. 

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In Q3, $51m of transaction revenue came from cryptocurrency, a large fall from the $231m seen in Q2. I specifically flagged up this risk back in August, when I reviewed the company here. I noted that the reliance on crypto revenues was unlikely to be sustainable. To be honest, I didn’t realise how quickly this could prove to be true.

Although there’s still an active market in crypto, the specialist exchanges such as Coinbase are taking clients and attracting more new ones. In recent results, Coinbase showed a large increase in customer acquisitions, with the outlook also positive. I struggle to see Robinhood (that’s more geared for stock trading) being able to compete in this space going forward.

Robinhood shares dropped following the results on Wednesday, and have continued to fall since then, even below the IPO level.

Better opportunities elsewhere

One bad quarter doesn’t mean the end of the world though. I do think that Robinhood has a great interface and is easy to use. This should see it retain stock investors, particularly younger ones. Being in this market should put the company in a good place in the long run, as the wealth of younger investors grows with age.

However, I don’t see value in buying Robinhood shares right now. The company posted another net loss in Q3. Personally, I don’t see why a firm in this sector shouldn’t be able to generate better levels of profitability and operate with higher profit margins.

Another issue I have is the fact that optimism was priced in to the IPO due to a surge in retail trading activity during the pandemic. Now that many are adjusting back into normal life, I think the benchmark for expectations from Robinhood is too high. Personally, I think the pandemic trading boom was a one-off and won’t continue at such elevated levels.

Clearly, I could be wrong. Robinhood could profit from another rally in crypto, fuelling activity into Q4. It could also bring out new products that allow more consistent revenue. Yet with the current business outlook, I won’t be buying Robinhood shares now.

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jonathansmith1 and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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