Financial services company Robinhood Markets, Inc. (HOOD), which is headquartered in  Menlo Park, Calif., is known for pioneering commission-free trades of stocks, exchange-traded funds, and cryptocurrencies via a mobile app. HOOD’s stock  declined in its public market debut on July 29, closing more than 8% lower at $34.82 per share. HOOD shares have slumped 41.8% in price over the past month and 22.8% over the past five days to close the last trading session at $21.55. HOOD declined more than 10% in its last trading session and hit its 52-week low of $21.50. The stock is now trading well below its 50-day and 200-day moving averages.

In November, the popular stock trading app disclosed that it had suffered a data breach involving approximately 7 million customers. The stock’s price plunged following the news.

For the third quarter, ended September 30, HOOD’s total net revenue came in at $364.92 million, missing the consensus estimate of $437.55 million by 16.6%, as cryptocurrency trading diminished. The company cited seasonal challenges and lowered retail trading activity as factors that impacted its third-quarter results and anticipated these headwinds to persist in the current quarter. Its average revenues per user (ARPU) decreased 36% year-over-year to $65, while crypto activity declined from record highs in the prior quarter in HOOD’s last reported quarter. The company also reported sequential declines in new funded accounts and net cumulative funded accounts in the third quarter of 2021. HOOD expects to generate fourth-quarter revenues no greater than $325 million and full-year revenue of less than $1.8 billion.

“The meme stock phenomenon we witnessed earlier in the year was more applicable to Robinhood’s recent customer growth and likely resulted in overestimation of the company’s core fundamentals and growth trajectory,” said Deutsche Bank analyst Brian Bedell.

Click here to check out our Software Industry Report for 2021

Here is what could shape HOOD’s performance in the near term:

Stretched Valuation

In terms of forward Price/Sales, HOOD is currently trading at 10.25x, which is 205.6% higher than the 3.36x industry average. Also, its 2.52 forward Price/Book ratio is 107.9% higher than the 1.21 industry average.

Lawsuits

The Schall Law Firm, a national shareholder rights litigation firm, is investigating HOOD on behalf of its investors, some of whom allege  securities laws violations. The investigation concerns whether the company issued false or misleading statements and failed to disclose information pertinent to investors. Also, Bragar Eagel & Squire, P.C., a nationally recognized stockholder rights law firm, is investigating whether HOOD has violated federal securities laws or engaged in other unlawful business practices. Several other law firms, including Scott+Scott Attorneys at Law LLP, are investigating the company on similar grounds. These investigations could negatively impact HOOD’s share price.

Weak Bottom Line

HOOD’s total net revenues increased 35% year-over-year to $364.92 million in its fiscal third quarter, ended September 30. Its total operating expenses stood at $1.71 billion, up 509% from the same period last year. And its loss before income tax came in at $1.37 billion, indicating a 12,333.5% year-over-year increase. Its net loss grew 12,250.6% from its year-ago value to $1.32 billion. The company’s net loss per share came in at $2.06, versus  a $0.96 consensus estimate. Which  reflects a 114.6% earnings surprise.

POWR Ratings Reflect This Bleak Prospects

HOOD has an overall F rating, translating to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a grade of D for Value, consistent with its lofty valuation.

HOOD has an F grade for Sentiment. This is justified because analysts expect HOOD’s EPS to remain negative until the next year.

Of the 169 stocks in the F-rated Software – Application industry, HOOD is ranked #167.

Beyond what I have stated above, one  can also view HOOD’s grades for Quality, Growth, Momentum, and Stability here.

View the top-rated stocks in the Software – Application industry here.

Bottom Line

Online trading platform HOOD has gained significant popularity during the pandemic period. However, in its most recent quarter, the company reported lower retail trading activity, which is expected to persist in the coming months. Last month, HOOD also disclosed a massive data breach, which caused its share price to plummet. So, given the company’s lofty valuation and bleak analysts' expectations, we think the stock is best avoided now.

How Does Robinhood Markets, Inc. (HOOD) Stack Up Against its Peers?

While HOOD has an overall POWR Rating of F, one might want to consider investing in the following Software – Application stocks with an A (Strong Buy) rating: Open Text Corporation (OTEX), Commvault Systems, Inc. (CVLT), and Oracle Corporation (ORCL).

Click here to check out our Software Industry Report for 2021

HOOD shares were trading at $21.60 per share on Monday morning, up $0.05 (+0.23%). Year-to-date, HOOD has declined -37.97%, versus a 23.49% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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