Robinhood, the brokerage that brought free trade to retail traders, has seen its stock price plummet as the retail frenzy subsides. The company, which had grown its user base to 12.5 million relatively quickly by offering free trades and membership bonuses, announced a downward revision to its revenue.
The stock has lost 67% of its value since the day the company went public. Investors have already begun filing class action lawsuits against the company because they believe the company may have misled them about the business prospects and risks associated with the business. Retail transaction volumes, which peaked in January 2021 at 27% of total market volume, fell to 21% in November 2021.
The rise in trade is believed to have been pushed, in part, by large stimulus checks provided to US citizens. However, growth is expected to slow as markets have trended lower and the prior year base is quite high.
Additionally, its new product launches have been marred by other asset classes such as the cryptocurrency downtrend. With choppy markets, investors usually postpone their investment decisions for a period of better clarity.
Robinhood gained notoriety with the Gamestop saga when retail investors on Reddit decided to buy Gamestop shares in droves. Similarly, Robinhood investors also bought shares of AMC. Hedge funds and investors who shorted Gamestop suffered huge losses, while Robinhood itself had to draw lines of credit to clear trades on its platform.
The funds had to be deposited at the clearing house as the Robinhood client continued to buy stocks and options, and the amount of funds required is decided based on volatility. It faced investor ire when it restricted the buying of some popular meme stocks by removing the buy button.
It is believed that large investors who had shorted the shares also put pressure on Robinhood. Regulators have also started looking into how Robinhood works to avoid excessive volatility in meme stocks. The Securities and Exchange Commission has also considered a payment prohibition for order flow (PFOF) – the mechanism Robinhood uses to earn revenue from market makers.
Other agencies investigating Robinhood include the U.S. Attorney’s Office for California, the U.S. Department of Justice, the Financial Industry Regulator, state attorneys general, and other regulatory agencies in the State. Its user interface, which attempts to ‘gamify’ stock trading and encourage users to trade more, has also come under scrutiny. After securing hundreds of millions in credit from banks, Robinhood stabilized its finances.
Currently, Robinhood expects its revenue to fall 35% from January 2021 as the numbers would not be supported by meme actions in the quarter. Profitability also remains a significant concern – the company has revenues of $363 million, while losses amounted to $423 million for the last quarter of 2021. Corrections in stock markets and crypto markets are expected to testing the ability of retail traders to digest corrections.
The previous year had been great for Robinhood as investors were full of cash and had few spending options as they were locked inside their homes. Whether it can continue to grow while becoming profitable remains to be seen to justify valuations.