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Buy Or Sell Robinhood Stock Ahead Of Earnings?

Robinhood’s third quarter earnings is just around the corner. Wall Street Memes discusses whether investors should buy HOOD ahead of the big day.

Robinhood  (HOOD) - Get Robinhood Markets, Inc. Class A Report will release its third quarter earnings report on Tuesday, October 26. The company went public in late July 2021 with an opening share price of $38 per share. HOOD skyrocketed upon debuting, climbing over 100% in the first five trading days. However, euphoria came and went, and the stock has fallen 42% from the peak to just above the IPO price.

Figure 1: Robinhood iOS widget.

Figure 1: Robinhood iOS widget.

Should investor be optimistic about the company’s second earnings report as a public company? We discuss whether buying Robinhood stock ahead of the big day might make sense.

HOOD’s Q2 recap

Robinhood’s first earnings season since the IPO was great on paper, although the stock failed to gain traction. The company delivered a massive EPS beat of 44 cents, much better than the loss estimate of 26 cents. On the top line, the company topped consensus by $5.8 million.

Total net revenues spiked 131% to $565 million last quarter. The strong numbers can be credited, in part, to retail investment frenzy, some of which fueled by discussion boards like Reddit. At least early in the pandemic, Robinhood was the commission-free brokerage of choice for newcomer investors to easily trade stocks and options.

Revenues on option transactions increased 48% YOY for a total of $165 million. Equity revenues, on the other hand, decreased 26% to $52 million. The highlight were revenues on cryptocurrency transactions: $233 million vs. a meager $5 million in the comparable 2020 period.

According to CEO Vlad Tenev, product access expansion, like crypto trading, was key to the rise in the number of traders on the platform. Monthly active users increased 109% to 21.3 million, more than double YOY. See chart above.

Figure 2: Robinhood's MAU.

Figure 2: Robinhood's MAU.

However, average revenues per user (ARPU) was $112 in Q2 of this year compared to $115 in the same period last year. The decline raised a yellow flag on Robinhood’s ability to monetize its growing subscriber base. See bar chart below.

Figure 3: Robinhood's ARPU.

Figure 3: Robinhood's ARPU.

Robinhood financial outlook

Maybe last quarter’s results were not even much of a factor in pushing the stock lower in post-earnings trading. In addition to shares “coming in too hot” into earnings season, the company’s outlook did not look very encouraging.

The company mentioned factors like seasonality, general market conditions and retail trends as tailwinds in Q2. However, management warned investors to expect lower trading activity and seasonal headwinds. Thus, loss of momentum in revenues and new users lies ahead.

For this reason, Wall Street Q3 estimates are conservative: net loss of $0.34. Projected revenues of $437 million, if achieved, would be lower sequentially by a noticeable $120 million. The silver lining is that expectations are de-risked ahead of earnings, as well as the stock price.

Wall Street consensus on HOOD

Robinhood stock has a moderate buy consensus based on 14 analysts. The $53 price target suggests 28% upside potential.

JPMorgan analyst Kenneth Worthington lowered his price target on Robinhood to $35, saying that HOOD is vulnerable with " fundamentals having softened”. He added that trading volumes have materially slowed from Q2, and that Robinhood should lag its cryptocurrency peers.

On the bullish side, Autonomous Research analyst Christian Bolu has a buy rating and sees 33% upside. The analyst said that Robinhood’s ARPU may triple over the next 3-5 years. He added:

"After significant user growth in 2020/21, we expect future revenue growth to be primarily driven by increased monetization (most notably in crypto & lending).”

The most bullish is Mizuho Securities analyst Dan Dolev, who recently maintained a buy rating on HOOD and set a price target of $68. A couple of months ago, Dolev’s shared his bullishness thesis on CNBC, see below:

Twitter speaks

After a massive EPS beat in Q2, what should investors expect of Robinhood on Q3 earnings day?

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(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 Wall Street Memes)