By Thornton McEnery
For a company named after a legendary archer, this one sure does miss a lot.
One year after it halted trading on the “meme stock” revolution that made it a $32 billion fintech superstar, Robinhood Markets Inc. /zigman2/quotes/228268942/composite HOOD -0.49% now looks set to open Friday trading with a distinctly “Little John” vibe.
Friday marks one year since the wildly popular zero-commission trading app halted trading on meme stocks like GameStop /zigman2/quotes/203755179/composite GME +9.35% , which had just shot up almost 135% the previous trading day, sending a shockwave through the stock market, prompting short-sellers to check their own actual shorts and giving Robinhood a troubling new understanding of how its own capital requirements were not adequate to handle the stock market revolution it had been openly fomenting for almost five years.
Although Robinhood was not the only online brokerage to halt trading on a short list of frothy names that also included AMC Entertainment /zigman2/quotes/200235402/composite AMC +10.16% , Bed, Bath & Beyond /zigman2/quotes/209801102/composite BBBY +3.83% , Nokia /zigman2/quotes/207421390/composite NOK +3.28% and others, it was the most popular and the most successful.
Therefore it immediately became the most vilified.
Over the next 12 months, Robinhood would find itself defending itself against its controversial “Payment for order flow” business model, various lawsuits and questions from Congress. It also eventually went public at the end of June.
It was felt at the time that Robinhood could conceivably weather the storms and use a new pool of retail traders and the cryptocurrency renaissance to reclaim its Wall Street wunderkind status.
But thanks to very, rough quarterly earnings results on Thursday and a 13% tumble in after-hours trading, when the market opens Friday, it’s possible that Robinhood’s stock could be trading at less than $10 a share. That would put its market cap at barely $10 billion, capping a galling fall of almost 84% from its high-water mark in early August, and putting its future into some serious question.
Not only did the company disclose Thursday that it missed on every metric that mattered, but it also indicated that it’s facing a worst-case scenario in which it’s spending more than it was last year, while its user base has shrunk considerably. And perhaps most worrying is that it revealed average revenues per user decreased 39% for the quarter.
That’s the equivalent of saying “Sure, we’re wildly less popular than we were last year, but at least the people who like us like us even less.”
Adding in the fact that payment-for-order flow looks destined to end in 2022 with a lot more regulatory red tape around it, and that it’s now losing some regulatory battles with retail investors , and the fact that it is not crushing it in a suddenly weak crypto sector…it looks really bad for co-founder/CEO Vlad Tenev and his not-so-merry men.
Tenev indicated on a conference call with analysts Thursday that the company is looking to address its need to execute its own order flow, but that will be a very violent transition for its P&E calculations. It seems maybe more likely now that Robinhood is an appealing merger target for a company that has what Robinhood lacks but needs what Robinhood still has.
As we’ve written before, Tenev wanted to turn Robinhood into a bank years ago, but that didn’t quite work out and will likely be a long road, thanks to that whole “sorry, we’re not that liquid” thing from last Jan. 27. One company that recently solved that problem is SoFi /zigman2/quotes/222838146/composite SOFI +2.03% , which — like a Silicon Valley Pinocchio — is turning into a real-life bank in 2022.
But what SoFi doesn’t have is a very lucrative trading platform with enough users to make it worthwhile. Those users could also translate into account holders, so we feel pretty confident that SoFi CEO Anthony Noto might be calling his old colleagues at Goldman Sachs /zigman2/quotes/209237603/composite GS +3.14% and asking them to kick some tires on Tenev & Co.
Even if that isn’t happening, Friday is a very strange one for Robinhood as both sides of the meme-stock wars are going to take stock of what’s really changed since last year. And while short-sellers are now looking at a much less overbought market and “Apes” are coming to grips with huge pullbacks on the GMEs and AMCs, it’s going to be painfully obvious that the clearest casualty after year one is the very platform that made the whole thing possible.