Two Problems Loom for Robinhood’s Stock

Robinhood (ticker: HOOD) has already warned investors that its rate of customer growth is likely to slump in the quarter, and its revenue could lag, too. But J.P. Morgan analyst Kenneth Worthington says the decline could be substantial enough to turn investors off.

Worthington rates Robinhood shares at Underweight with a $35 price target. The shares were down 0.5% on Wednesday, to $44.40.

App download data from research firm Apptopia shows that Robinhood is still attracting more customers than other brokerage firms, with 1.8 million downloads in the quarter so far, versus 179,000 for Charles Schwab (SCHW). Coinbase Global (COIN) has been downloaded 4.5 million times in the quarter, leading the crypto world, the report says.

New downloads of the Robinhood app, however, are down 78% from the second quarter. Other brokerages have seen much smaller declines on a percentage basis, with Schwab down 15% and Interactive Brokers Group (IBKR) down 1%, Worthington wrote.

Crypto app downloads from most major trading platforms are down about 50%, he added. (App downloads are not the same as new customers, but can provide some information about growth rates.)

Robinhood did not respond to a request for comment on the data.

Also troubling for Robinhood is the decline in trading activity. Daily active users are down 40% on a quarter-over-quarter basis, more than competitors in the traditional brokerage and crypto worlds, the app data indicates. Robinhood makes about 80% of its revenue from transactions, so a decline in activity is likely to hit its revenue hard.

In addition, Robinhood stock could see selling pressure in the months ahead as lockups expire and more shareholders are able to sell their shares. 

“We estimate Robinhood’s public float in shares remains small, but has the potential to increase meaningfully in the coming months as various shareholder milestones are met under the terms of the IPO,” Worthington wrote. 

The small size of Robinhood’s float is one reason its shares have been volatile since making their debut in July. If insiders sell shares, it could be a mixed bag for the stock. A larger float might reduce volatility, because more shares would be available to buy and short. And institutional investors might become more comfortable with the shares, because the shareholder base is likely to expand beyond the retail investors that have driven trading activity in the early weeks.

But it could also increase selling pressure on the stock if insiders start to flee.

Worthington estimates that about 59 million shares were available to trade after the IPO, out of 924 million shares outstanding. Since then, the unlocking of convertible notes could soon make millions of more shares available. Depending on how many were exercised, the float may rise to nearly 160 million shares.

After Dec. 1, as many as 567 million additional shares could be available to trade, depending on whether their owners sell them, Worthington notes. Many of those shares are held by the company’s founders and are unlikely to hit the market all at once — but in any case, the float and selling pressure could increase.

When Robinhood last announced that a tranche of shares could be sold, shares fell about 10% over the next week. Worthington thinks that could happen again.

Write to Avi Salzman at avi.salzmanbarrons.com