Shares of the brokerage app, Robinhood Markets Inc. (HOOD), which plans on democratizing finance, have been in a free fall since its IPO last year. After gaining widespread attention in the meme stocks frenzy HOOD went public in mid-2021 and has since continued its descent, and has lost over half its value just this year. Reporting new lows upon new lows in recent weeks, the company has been bleeding users and has even laid-off staff. What comes as a surprise is a fact that crypto billionaire Sam Bankman-Fried just acquired a huge stake in the company which has been failing miserably so far, claiming it to be “an attractive investment”.
After a filing on Thursday, May 13, revealed the billionaire’s stake in the company, HOOD rallied in the after-hours following its plunge down to a new low. Thus, the stock added 23.83% in the late trading session to trade at a value of $10.60 at a volume of 8.04 million shares. This came after the stock registered its latest all-time-low of $7.71 in the prior session.
The Questionable Stake of Bankman-Fried
The billionaire founder of crypto exchange FTX, Samuel Benjamin Bankman-Fried has now become the third-largest HOOD shareholder with a 7.6% stake. A filing on Thursday revealed that he now owns a position worth $648.3 million in the company after acquiring 56,273,469 of its shares. Bankman-Fried made the investment through Emergent Fidelity technologies, of which he is the sole director and majority owner.
Moreover, according to the filing, he believes that HOOD shares “represent an attractive investment” and has no plans to sell them as of yet.
Let’s have a look at why the stake is questionable at the very least:
HOOD’s Financial Analysis
The brokerage app disclosed its latest earnings report for the first quarter of 2022 on April 28. The company’s total revenue declined by 43% YOY to $299 million as its transaction-based revenue took a hit of 48%. Cryptocurrency transactions went down by 39% while equities by a huge 73%. Analysts were expecting a comparatively milder decline to $355 million from the year-ago’s $522 million.
While the net loss did shrink YOY, it came below analysts’ expectation of 38 cents for the quarter at 45 cents per share. The net loss was $392 million in Q1 2022 against $1.4 billion in the year-ago period. However, the wider net loss in 2021 was due to $1.5 billion in expenses related to changes in the fair value of convertible notes and warrants issued back then.
Moreover, the company is also bleeding users with monthly active users (MAU) down 10% YOY and 8% sequentially. The reported MAUs were 15.9 million against the prior quarter’s 17.3 million and year-ago’s 17.7 million. Added to this was a stark decline of 62% in average revenues per user (ARPU) which hit $53 against $137 in Q1 2021. The decline was 18% against $64 in the previous quarter.
HOOD ended the March quarter with cash and cash equivalents of $6.2 billion, declining just $0.1 billion from the prior quarter.
Future Guidance & Concerns
Even though HOOD came out with an EBITDA loss of $143 million for Q1 2022, the widest since 2020, it said that it expects to reach adjusted EBITDA profitability by the end of this year. While it did well with the value in 2021, it was primarily due to the elevated trading activity and meme stock frenzy on top of the crypto boom.
The company has been taking multiple steps to help diversify and boost revenue through crypto wallets rollout, adding new cryptocurrencies, and even through the external acquisition of Ziglu Ltd. According to the CFO Jason Warnick, the company would need to increase ARPU for achieving the adjusted EBITDA profitability but this seems quite challenging as its ARPU fell vastly in Q1. The company would need to have its ARPU in the mid-$80s but it has been well away from the figure for several quarters. To help boost ARPU, the company has even decided to start a stock lending program for a fee, going all out but profitability still remains a question.
While the company has been taking all kinds of measures to help boost revenue and cut costs, including a 9% employee lay-off, its latest earnings only showed a bleak picture. In early May, the VC of Berkshire Hathaway, Charlie Munger said to stay away from the stock as he as well as many writers have been claiming the stock to be up for a bleak future. However, the latest stake by the crypto billionaire has raised many questions. Bankman-Fried might be looking at the stock from a very long-term point of view as everything suggests the near future to be bleak. Reasons to claim as such include the vast geopolitical and economic instability, falling equities, tumbling crypto amid the looming recession as inflation and interest continue to soar on top of the company bleeding users, lagging growth, and widening its EBITDA losses as ARPU tumbles further.
On the other hand, HOOD said that it’s planning to further diversify its portfolio of offerings and launch many new products that will help its boost ARPU and possibly help it achieve EBITDA profitability by the end of this year. But this again is very questionable amid the current market as well as company situation.