By now, every investor has probably heard of Robinhood (NASDAQ: NASDAQ:HOOD) as the company quickly scaled up during the pandemic with consumers looking to invest their stimulus funds. Whether it was the rise of cryptocurrencies or the meme stock frenzy, consumers did not want to miss out on the action.
However, now that the dust has settled and we are starting to experience a more challenging macro-economic environment, Robinhood as seen their revenue and profitability significantly deteriorate.
With the stock down over 50% so far this year and down over 80% from all-time highs, it appears the company timed the market perfectly in terms of their IPO. During 2020 and 2021, consumers received several stimulus payments, meme stocks took over, and the average investor learned more about cryptocurrencies.
I believe these positive factors led to a significant rise in personal investment trading platforms. However, I believe the macro environment could remained challenged over the coming quarters and with Robinhood's revenue being 70%+ based on transactions, the company could continue to see deteriorating in monthly active users and profitability. If the company continues to lose users and the average consumer transacts less, this could doubly impact growth.
For now, I believe long-term investors should remain cautious and steer clear of this downward trend. While I do believe Robinhood has a great platform and one of the best user interfaces, I believe the stock may continue to be pressured over the coming quarters.
During Q1, revenue declined 43% yoy to $299 million and was nearly $60 million below consensus expectations. Transaction-based revenue, which reflects just over 70% of total revenue declined 48% yoy to $218 million. Clearly, consumers started to use Robinhood a lot less during the market pullback as the number of transactions declined.
While net interest revenue and other revenue declined less than total company revenue decline, overall trends were not favorable during the quarter. Options revenue declined 36% to $127 million, cryptocurrencies declined 39% to $54 million, and equities declined 73% to $36 million. Not great trends to start the year.
Non-GAAP adjusted EBITDA also came in at a loss of $143 million, compared to a positive $115 million in the year ago period. The big swing in adjusted EBITDA was largely due to a significant revenue declined coupled with operating expenses remaining high. Yes, I understand the company's long-term vision requires significant capital investments, however, management needs to focus more on a healthy balance of growth and profitability for the stock to work longer-term.
Discouragingly, monthly active users actually experienced a yoy decline of nearly 2 million. During Q1, MAUs came in at 15.9 million, which also represented the third consecutive quarter of declining users. On top of the declining users, the average revenue per user declined 62% yoy to $53, which also represented an 18% sequential decline.
Part of the declining MAUs may be attributed to increased competition in the marketplace, though management also noted challenging macro environment factors.
When we look a level deeper, our larger customers are still remaining active but we are seeing more pronounced declines from those that have lower balances. With the uncertainty in the market, our customers became more cautious with their portfolios, trading less frequently and in smaller amounts across all asset classes, although crypto activity, in particular, came down pretty significantly.
In my opinion, investment trading platforms have become very competitive as consumers has many options to choose from. On top of the traditional brokers who have been around for decades, newer platforms such as Robinhood have popped up in recent years.
Let's remember, 2020 and 2021 could have been some of the best market conditions for trading platforms. On top of the significant pandemic-fueled pullback providing good buying opportunities, there were several other factors at play.
First, consumers were flushed with cash as they received multiple rounds of stimulus payments. With certain forms of debt repayments being delayed, such as student loans, the consumer balance sheet significantly improved, thus giving people funds to invest.
On top of that, the meme-craze caused everyday investors to become highly interested in the stock market. With the rise of Reddit and other networking boards discussing the stock market, consumers were flushed with investments.
Finally, the significant rise in cryptocurrencies caused many consumers to find ways to invest. Whether it was the fear of missing out on potential returns or the long-term belief in cryptocurrencies, consumers wanted to invest.
During the earnings call, management talked about a challenging macro backdrop, and the company recently announced they are letting go nearly 10% of their workforce in an effort to improve profitability.
So I've challenged the team to dig deeper on cost discipline and get us to adjusted EBITDA profitability by the end of the year. We're moving back towards a leaner operating model, starting with the reduction in force that we announced earlier this week. But make no mistake, Robinhood is still playing offense and charging ahead. We are continuing to execute on our 2022 road map. And we've got several new products in flight that we believe will add value to customers while generating significant revenues.
I believe the macro-economic environment will become increasingly challenged in the coming quarters. Rising interest rates, global disruption caused by the Ukraine war, supply chain issues, high inflation, fears around recession. All of these are recent events that have weighed on the stock market.
Also, let's not forget than in challenging times, consumers are less likely to be interested in investing in the stock market, cryptocurrencies, or other investments. The average consumer has been their personal balance sheet improve over the past few years given the numerous benefits seen from stimulus programs. As these cash buffers decline and a potential recession looms, trading platforms such as Robinhood may face increased pressure.
With monthly active users and revenue per user continuing on a path of sequential declines, it's no surprise the stock is down over 50% year to down and over 80% from all-time highs.
As the company went public in mid-2021, we might have been in one of the best environments for the consumer. The average person received multiple stimulus payments, debt repayments were deferred in many circumstances, and people were stuck at home. This combination naturally led to an interest in stock and cryptocurrency investing.
However, with a challenging macro backdrop including rising interest rates, high inflation, and fears around a recession, the healthy consumer may begin to experience some pain. While it's not certain, I believe consumers will become less focused on investment trading platforms during challenging times as they may be more focused on making a paycheck to pay the bills.
Right now, the stock currently trades around 2.5x forward revenue, which is a significant pullback compared their historical 5-7x forward revenue levels. Revenue growth will likely remain volatile over the long-term as a majority of their revenue is transaction-based. Thus, consumers are not constantly transacting on the platform, Robinhood stands to generate less revenue.
This also makes consistent profitability a challenge. During the good times of 2020 and 2021, Robinhood was able to generate positive adjusted EBITDA. As the markets have pulled back and the macro environment has deteriorated, so has Robinhood. This name is very cyclical and with fears of a potential economic slowdown and/or recession, I believe this name could continue to face negative sentiment. If we do start to see an economic slowdown, consumers may have less cash available to day trade, and may end up not utilizing trading platforms with high frequency.
At the end of the day, Robinhood is a cyclical company that tends to do very well during prosperous times and underperforms during challenged periods. As we start to enter a potentially slower growth period, as estimated by economist, consumers may not have excess funds to invest. The combination of continued MAU declines and lower profitability per user is worrisome.
While the stock has continued a downward trend, I do believe there is some floor to keep in mind. The company has around $6.2 billion of net cash on their balance sheet, which equates to over $7 of cash per share. With the stock currently trading just over $9, it's clear that investors are not placing a lot of value in the underlying equity.
I am not saying that investors should buy the stock just because of the large cash balance, but I do believe it could provide a soft floor. It also would not surprise me if the stock were to continue the downward trend and trade below the $7 net cash per share level.
For now, I am remaining on the sidelines as we could see the stock continue to trend lower.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.