Robinhood Markets, Inc. (HOOD) operates a financial services platform in the United States. Its platform enables users to invest in stocks, exchange-traded funds (ETFs), options, gold, and cryptocurrencies. The company offers commission-free trading services and is known for its easy-to-use, streamlined platform and appeal to investors new to the investment game.

However, in recent years, Robinhood has been severely targeted by regulator crypto crackdown. Yesterday, HOOD announced that it is being investigated for its trading execution, the latest in a string of regulatory and legal proceedings faced by the online brokerage.

“The New York Attorney General is conducting an investigation into brokerage execution quality. We are cooperating with this investigation,” the retail trading firm said in a recent filing.

Also, on June 9, HOOD announced to remove three tokens, including Cardano, Polygon, and Solana, from its crypto trading platform. In a Twitter thread, the company specifically cited the SEC’s actions as reasons for the delisting, saying the Coinbase and Binance lawsuits “introduced a cloud of uncertainty” around the tokens.

The financial services company reported solid second-quarter revenue as interest rates continued to buoy its interest income, achieving profitability for the first time as a public company. HOOD’s net interest revenue grew 243% year-over-year to $442 million in the second quarter, as its brokerage margin investing business benefitted from the Fed’s monetary policy tightening campaign to fight high inflation.

The company reported second-quarter revenue of $486 million, up 53% year-over-year, beating analysts’ estimate by $8 million. Its earnings per share were $0.03, surpassing analysts’ average estimate of a loss of $0.01, according to Refinitiv data.

Despite its profitable quarter, investors are growing concerned about HOOD’s platform’s decline in monthly active users. Its monthly active users (MAU) declined to 10.80 million, one million less than the previous quarter and 3.2 million fewer than the previous year. As a result, transaction-based revenue decreased nearly 5% year-over-year during the second quarter.

Shares of HOOD have gained marginally over the past month and 7.1% over the past six months to close the last trading session at $10.80.

Here is what could shape HOOD’s performance in the upcoming months:

Mixed Financials

For the second quarter that ended June 30, 2023, HOOD’s net revenues increased 52.8% year-over-year to $486 million. the company’s transaction-based revenues decreased 4.7% year-over-year to $202 million. As of June 30, 2023, its cash and cash equivalents were $5.83 billion versus $6.34 billion as of December 31, 2022.

In addition, HOOD’s adjusted EBITDA was $151 million, compared to an EBITDA loss of $80 million in the same period of 2022. Its net income and net income per share attributable to common stockholders were $25 million and $0.03, compared to a loss of $295 million and $0.34, respectively.

Mixed Analyst Estimates

Analysts expect HOOD’s revenue for the fiscal years 2023 and 2024 to increase 40.1% and 12% year-over-year to $1.90 billion and $2.13 billion, respectively. However, the company is expected to report a loss per share of $0.51 for the current year.

Elevated Valuation

In terms of forward Price/Sales, HOOD is currently trading at 4.80x, 90.5% higher than the industry average of 2.52x. Likewise, the stock’s forward Price/Book multiple of 1.25 is 11% higher than the industry average of 1.12. In addition, its forward Price/Cash Flow of 15.68x is 65.8% higher than the 9.46x industry average.

Poor Profitability

HOOD’s trailing-12-month net income margin of negative 49.58% compares to the industry average of 25.54%. And its trailing-12-month ROCE and ROTA of negative 11.64% and negative 2.89% compare unfavorably to the industry averages of 11.22% and 1.11%, respectively.

Furthermore, the stock’s trailing-12-month CAPEX/Sales of 0.54% is 72.2% lower than the industry average of 1.94%.

POWR Ratings Reflect Uncertainty

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

Our proprietary rating system also evaluates each stock based on eight distinct categories. HOOD has a D grade for Quality and Value, consistent with its lower-than-industry profitability and higher-than-industry valuation.

In addition, the stock’s 24-month beta of 1.57 justifies the Stability grade of D.

HOOD is ranked #112 of 136 stocks in the D-rated Software - Application industry.

Beyond what I have stated above, we have also given HOOD grades for Sentiment, Growth, and Momentum. Get all HOOD’s POWR Ratings here.

Bottom Line

Although online brokerage HOOD reported profitable second-quarter results, investors are bearish about the stock due to the company’s shrinking active user base. Furthermore, Robinhood’s near-term prospects look bleak as it faces regulatory and legal headwinds.

Given HOOD’s declining users, weak growth prospects, low profitability, and stretched valuation, we think this stock could be best avoided now.

Stocks to Consider Instead of Robinhood Markets, Inc. (HOOD)

The odds of HOOD outperforming in the weeks and months ahead are greatly compromised. However, there are many industry peers with impressive POWR Ratings. Thus, consider these three stocks which are A-rated (Strong Buy):

Enghouse Systems Limited (EGHSF)

IBEX Ltd. (IBEX)

eGain Corporation (EGAN)

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HOOD shares rose $0.12 (+1.11%) in premarket trading Thursday. Year-to-date, HOOD has gained 32.68%, versus a 17.44% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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