Shares of Robinhood Markets Inc. fell into record-low territory Wednesday, after Atlantic Equities analyst John Heagerty turned bearish on the trading app, and suggested further declines of 30%.
dropped 1.4% in premarket trading, putting them in danger of suffering a record-long winless streak of nine sessions. It closed Tuesday unchanged, after tumbling 25.5% the previous seven sessions.
Heagerty downgraded Robinhood to underweight, a rating which at Atlantic Equities means the stock is deemed to be “particularly unattractive” over the next 12 months.
He lowered his stock price target to $5, which implies about 30% downside from current levels.
There are three main reasons for the bearish outlook:
Declining user growth a clear headwind to revenue growth.
Heagerty said that Robinhood’s monthly active users (MAUs) have been “declining rapidly” over the past year and average revenue per user (ARPU) has dropped 61% from the peak in the first quarter of 2021, at the height of the “meme”-stock frenzy.
“With customers returning to pre-pandemic behavioral trends and a potential recession ahead, user engagement seems likely to decline further,” Heagerty wrote in a research note for clients.
Falling equity trading volumes and regulatory change threaten equity revenue.
Retail trading levels tend to decline with a slight lag to weakness in the stock market, Heagerty said. So with the S&P 500 index
down 16.4% in the second quarter to date, he expects retail trading volumes to remain weak into the third quarter. He added that “an impending recession is likely to further dampen enthusiasm for trading.”
Separately, the Securities and Exchange Commission has been pushing for greater transparency surrounding payment for order flow (PFOF), which could weigh heavily on Robinhood’s profitability, as the company said in its latest quarterly filing.
“Proposed changes to market structure could potentially eliminate PFOF, threatening 10% of Robinhood’s revenues,” Heagerty wrote.
Plummeting cryptocurrency valuations and volumes will also impact revenue.
Cryptocurrency trading volumes have continued to fall this year, with quarter-to-date volumes less than half what they were a year ago, and is likely to keep falling as crypto values extend declines.
dropped 2.7% in morning trading Wednesday toward an 18-month low. It has tumbled 31.2% amid a seven-day losing streak, and has plummeted 53.5% year to date.
“[T]he decline in cryptocurrency valuations will put pressure on both volumes and revenue per trade, which is calculated as a percentage of notional order value,” Heagerty wrote.
Robinhood’s stock has tumbled 59.9% year to date, and has lost 79.5% of its value since it went public on July 29, 2021, when it closed at $34.82. Bitcoin has dropped 46.0% since Robinhood went public and the S&P 500 has lost 14.3%.