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Robinhood May Be Caught in a Vicious Cycle

With Robinhood (NASDAQ:HOOD) stock facing a perfect storm of a looming cryptocurrency collapse, disappointing third-quarter results, stepped-up competition, and increased caution on the Street about growth names, it’s definitely time to sell HOOD stock.

Source: i2.wp

Also not helping matters is the fact that, even after the stock crashed in recent months, its valuation remains quite elevated.

A Looming Cryptocurrency Collapse and Disappointing Q3 Results

Fed Chairman Jay Powell announced at the end of last month that he would back ending the central bank’s bond buying more quickly than previously planned, causing most cryptocurrencies to decline sharply.

I have long warned that the crypto boom was primarily fueled by government stimulus, although I primarily identified the aid provided by Washington directly to consumers as the main impetus for the sector’s runaway gains. Nonetheless, I now believe that, with the federal governments’ aid to consumers having waned and the Fed about to taper, cryptos’ two main support systems have been greatly undermined. Consequently, I think that we are only in the early innings of a massive crypto collapse.

In the third quarter, nearly 15% of Robinhood’s revenue was generated from cryptocurrency transactions. So, HOOD stock is likely to tumble further if cryptos do crash soon.

Meanwhile, in Q3, the number of the company’s funded accounts fell by 100,000 versus Q2. According to Seeking Alpha columnist Steven Fiorillo, that’s the first time since at least the fourth quarter of 2020 that the company’s paid accounts have not increased sequentially.

And Robinhood’s monthly active user base dropped 2.4 million, or 11.2%, in Q3 versus Q2, falling to 8.2 million users.

A Possible Negative Cycle

It’s probably not at all coincidental that Robinhood’s key metrics dropped in Q3 versus Q2, while most cryptocurrencies and meme stocks stopped booming towards the end of Q3.

Actually, I believe that many millennials became much less interested in investing when the cryptocurrencies and meme stocks stopped surging tremendously. As the millennials dropped out of the game, the gains of the meme stocks and cryptocurrencies became even less powerful, leading more millennials to withdraw from investing.

It’s easy to see how this could become a vicious cycle that is quite detrimental for Robinhood and HOOD stock.

I believe that, by causing millennials’ confidence to drop sharply, Powell’s announcement has greatly intensified the strength of this cycle. That, in turn, bodes very badly for Robinhood.

Intensified Competition and Increased Caution on Wall Street

When I last wrote about HOOD stock in August, I noted that Robinhood had already shown that it knows very well how to attract millennials. I cited Cestrian Capital Research, which stated in an Aug. 20 column that Robinhood had attracted many millennials with “its simple app and website, modern user interface and focus on accounts with relatively small balances.” Robinhood also became popular by allowing investors to buy and sell cryptocurrencies.

But now other trading platforms have taken similar steps. For example, Fidelity Investments, which hosts my IRA, has introduced the purchase of fractional shares and simplified and modernized its website. Meanwhile, Charles Schwab (NYSE:SCHW) and Interactive Brokers (NASDAQ:IBKR), whose platform I utilize, have also introduced fractional share purchases. And there are now many platforms on which cryptocurrencies can be traded.

Additionally, I could not find any evidence that Robinhood has branched into other types of financial services, beyond a simple cash management account. So, the company is facing increased competition in its core investing platform while largely failing to branch out to new products.

Finally, since Powell’s statement, the Street has become very cautious of money-losing companies. That does not bode well for Robinhood, as the firm, in the 12 months that ended in September, reported operating income of -$1.1 billion.

Valuation and the Bottom Line on HOOD Stock

Despite all of Robinhood’s challenges, HOOD stock is still trading at a rather high trailing price-sales ratio of 10.4.

Given all of the company’s weaknesses and threats, along with the high valuation of its shares, I strongly recommend that investors sell the name.

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