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4 Reasons Why Dumping Robinhood Stock Is a Good Idea

Discount broker Robinhood was a hot stock when it debuted on the stock market this year. But now it's shares have cratered. Here's why you should get out.

Discount trading platform Robinhood  (HOOD) - Get Robinhood Markets, Inc. Class A Report had one of the most talked-about initial public offerings (IPOs) of the year when it debuted on the stock market back in July.

But since then, shares have dropped more than 45%.

A handful of bearish factors have thrown cold water on HOOD investors -- including growth misses, fierce competition, and a loss of customers.

And faced with the uncertainties of higher interest rates and the curtailing of government stimulus, Robinhood will have a lot of extra challenges to deal with.

Figure 1: Robinhood gadget app on an iPhone.

Figure 1: Robinhood gadget app on an iPhone.

So let's break down the top four reasons why dumping Robinhood's stock now may be a good idea.

(Read more from Wall Street Memes: AMC Stock: Spider-Man And Other Reasons To Be Bullish)

1. Slowing Growth

During previous quarters, the whole retail trading industry saw a boost from COVID. After all, employees were stuck at home and bored.

Robinhood needs to prove that, post pandemic, it's still on a growth path. And that just didn't happen in the third quarter. In its most recent earnings release, Robinhood announced disappointing results, missing targets for both earnings and revenues.

To make matters worse, Robinhood's management released a downbeat forecast for the fourth quarter, as well as for the full fiscal year.

Robinhood said that, in the fourth quarter, revenues will fall short of $325 million. That's noticeably lower than the $365 million in revenues the company made in the third quarter. And management expects full-year revenue of less than $1.8 billion.

In an attempt to downplay these unimpressive results, CEO Vlad Tenev highlighted the company’s efforts on product development. He reported that his company was more focused on product and services developments than on revenue in the past quarter. However, investors weren't too impressed.

2. Better Competitors

Robinhood was a pioneer in offering fee-free stock and ETF trading.

However, a number of larger broker-dealers followed suit by eliminating commissions on most trades. That stripped Robinhood of its main advantage.

Robinhood's competitors -- big names like Charles Schwab  (SCHW) - Get Charles Schwab Corporation Report and Fidelity -- are better positioned to deal with post-pandemic uncertainties. They're massive institutions with diversified businesses.

They also offer more tradable assets than Robinhood does, giving them momentum as investors look beyond stocks and ETFs to alternative plays.

JPMorgan analyst Ken Worthington mentioned that Robinhood has a way to go to become a contender against brokers like Schwab.

Although Robinhood has brought on 22.5 million new accounts, the average AUM (assets under management) per account is only $4,000. Schwab’s per-account assets are 75 times larger, according to the analyst.

3. Customers Are Leaving

Robinhood reported that, during the past quarter, it lost customers. That came after record customer growth in the first half of 2021. And it may be the first sign that the company’s promises of zero commissions have stopped luring in new users.

Of course, a lot of customers are probably leaving the platform because Robinhood's payment for order flow (PFOF) model is being scrutinized by the U.S. Securities and Exchange Commission (SEC).

In addition, a lot of the "meme investors" are beginning to question Robinhood's business model and lack of transparency. Just as discussions on Reddit caused Robinhood to become a household name, they can also turn public opinion against the platform and its stock.

4. Ties to Cryptocurrency

Finally, Robinhood appears to be very sensitive to cryptocurrency hype. In the second quarter of 2021, Robinhood reported $223 million in revenue from cryptocurrency trades. During the third quarter, that number plunged to $51 million.

It's becoming obvious: As cryptocurrencies lose their values, Robinhood will also lose revenue.  

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Wall Street Memes)