Robinhood shares stumble as trading frenzy wanes, regulator circle

Jan 27 (Reuters) – Robinhood Markets Inc (HOOD.O) became a household name ahead of its stellar IPO last year, when retail investors used its trading app to bring in shares of GameStop and… other “meme stocks” in the stratosphere, but name recognition hasn’t helped its stock price lately.

“The market isn’t very patient with them,” said Greg Martin, co-founder and managing director of Rainmaker Securities, a brokerage firm specializing in transactions with private companies.

Declining investor interest in retail has weighed on shares of commission-free online brokerage, which saw explosive growth in early 2021 as retail investors gobbled up viral stocks including GameStop (GME .N) and AMC Entertainment (AMC.N). Robinhood’s monthly active users grew from 11.7 million at the end of 2020 to 21.3 million at the end of June 2021.

California-based Robinhood had a valuation of $31.8 billion when it went public in July. But it has since slumped and closed Wednesday down 85% from its 52-week high.

In addition to lower trading volumes, analysts cited regulatory scrutiny of Robinhood’s main source of revenue: the order flow it sells to market makers.

“They have a global brand, which they did without any marketing. Now they need to create more sustainable and sustainable revenue streams,” Martin said.

An analyst said Robinhood needed to find a way to boost its share price or it could become a takeover target.

Robinhood declined to comment, but said it continues to win customers by adding new products and features, and expects that trend to continue. The company, which offers stocks, options and cryptocurrency exchanges, is due to release its fourth quarter results on Thursday afternoon.

Like many tech start-ups, Robinhood has yet to turn a profit as a public company. Its two quarters of results have so far disappointed investors.

Robinhood’s modest revenue gains were largely due to an increase in crypto trading in the second quarter. Equity trading activity has eased from peaks in last year’s trading frenzy, partly offset by an increase in options volumes.

Robinhood’s average revenue per user fell to $65 in Q3 from $137 in Q1 2021.

Analysts agree the company needs to expand its offerings to survive in a crowded space, particularly if U.S. stock prices fall further from record lows as expected as the Federal Reserve prepares to raise interest rates.

Chaim Siegel, founder and head of US equity research at Elazar Advisors, called rising interest rates a major threat.

“So many high-flying, no-revenue and low-revenue companies have just been hit very hard over the past two months,” said Siegel, who downgraded Robinhood to neutral in August.

Last week, investors sold stocks as they grappled with shifting Fed policies and tensions between Russia and Ukraine. Wall Street recorded its biggest weekly decline since the start of the pandemic in March 2020.

Rising interest rates will likely push investors into safer assets, and many may reduce their positions in stocks or crypto. That could mean fewer trades for retail investors, Robinhood’s core customer base.

“A ton of them will lose money and then lose interest,” said Jeff Tomasulo, managing director of Vespula Capital Management.

Retail trading volume peaked in January 2021, accounting for nearly 27% of US stock trading volume, according to data from the Securities and Exchange Commission (SEC). In November, retail trading volume had fallen to 21.42% of total market volume.

DRY REPRESSION

The U.S. Securities and Exchange Commission (SEC) is considering reforming or even banning payment for order flow (PFOF), whereby broker-dealers route trades to wholesale market makers in exchange for a commission.

Robinhood earned nearly 75% of its revenue from PFOF and other transaction rebates in Q3 2021.

He said he didn’t expect the SEC to ban the practice, but said he was confident he could find other ways to generate revenue, possibly executing client orders internally.

Still, the threat of an SEC crackdown is an “overhang” for the stock, said Martin of Rainmaker Securities.

Seeking to expand its revenue stream beyond trading, Robinhood now offers its customers the option to purchase IPOs. She’s testing a wealth management tool and talking about offering retirement accounts. Read more

Robinhood shareholders are likely looking for the company to limit spending, Siegel said, which would make it harder to offer new products. The company is also facing fines stemming from the meme stock market frenzy last year.

Robinhood’s legal fees rose from $1.4 million in 2019 to $105 million in 2020, according to its IPO filing. Other financial companies were also penalized by upward pressure on labor costs.

Tomasulo said it remains to be seen if the market will be patient.

“There aren’t many brokers like Robinhood, so I can see Robinhood getting cheaper and cheaper, it’s becoming a really good takeover target.”

Reporting by Hannah Lang in Washington; additional reporting by John McCrank; edited by Michelle Price and David Gregorio

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