Robinhood Markets (NASDAQ:HOOD) stock dropped by as much as 67 cents, or 5.55%, in premarket trading on Friday after Goldman Sachs declared it a sell just nine months after its initial public offering (IPO). And investors should follow that advice.
Goldman Sachs Vice President Will Nance said Robinhood’s inability to grow users will hurt its projected profitability and future growth. “We see an acceleration in user growth as a key requirement for shares to re-rate higher,” Nance stated in a note.
Outside stock trading, Nance thinks Robinhood cryptocurrency trading has stronger economics, but the drop in volume is offsetting whatever economic value the company could drive from its cryptocurrency unit.
Robinhood rose to global prominence during the peak of the pandemic when the federal government handed citizens over $1.5 trillion in stimulus checks. A group of unconventional traders numbering over 3 million on Reddit, a networking and discussion forum, used the Robinhood app to access meme stocks and cryptocurrencies. That created excessive activity that aided Robinhood’s valuation, revenue, new account numbers and the eventual IPO in July 2021.
Meme stocks like GameStop (NYSE:GME), AMC Entertainment Holdings (NYSE:AMC) and meme cryptocurrencies like Dogecoin (DOGE-USD) were aggressively traded by these Redditors and on a few occasions trading was halted to cap the extreme surge in the prices of Redditors’ favored assets.
Here is why Hood stock is a sell.
The company’s monthly active users have been declining since the securities and Exchange commission (SEC) announced plans to improve online trading rules. Monthly active users declined by 8%, from 18.9 million in September 2021 to 17.3 million in December 2021, while the average revenue realized per user decreased to $64, a 39% decline from $106 achieved in 2020 before meme activities.
According to the company “the decrease was primarily related to lower trading volumes per user for options and equities and lower interest earnings per user from securities lending due to declines in market rates earned on loaned securities, partially offset by higher trading volumes per user for cryptocurrencies.”
As clearly stated, Robinhood trading volumes drop with users. And the only unit with stronger trading volumes, cryptocurrency, could drop going forward. The cryptocurrency space may be entering its first phase of a long bearish trend, especially with the Fed expected to raise rates more aggressively going forward.
As long as Robinhood’s user numbers continue to drop, then weak revenue and the inability to turn profitable will continue to weigh on the outlook of Robinhood. HOOD stock has dropped by6.8today and
On the date of publication, Samed Olukoya did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.