The Robinhood share price slumps! Here’s what I’d do now

Initial indications suggest the Robinhood (NASDAQ: HOOD) share price could fall more than 10% when the market opens on Thursday. That’s a big slump for one of the market’s hottest stocks. 

Robinhood filed its first earnings report as a public company yesterday, and it looks as if the report has gone down like a lead balloon among investors. 

Mixed earnings 

The company’s earnings were a bit of a mixed bag. The trading app recorded a loss of $502m on revenue of $565m. Most of its revenue came from digital asset trading. Nearly 63% of users with funded accounts traded digital assets in the quarter, raking in $233m in fees for the firm.

A year ago, Robinhood earned just $5m in fees from digital assets. The group earns fees by routing customers’ cryptocurrency trades to high-speed trading operations. 

Meanwhile, fees earned from customers equity totalled just $52m, down 27% year-on-year. 

The bulk of Robinhood’s revenue is earned when the company sends customer orders to high-speed trading firms. But it also operates a booming margin lending business.

Interest the enterprise received on margin loans nearly tripled to $31m during the quarter, with around 700,000 users holding $5.4bn in margin-loan balances at the end of June.

It would appear investors have been dumping the Robinhood share price as management expects the company’s growth to slow in the current quarter.

“We expect seasonal headwinds and lower trading activity across the industry to result in lower revenues and considerably fewer new funded accounts than in the prior quarter,” the firm noted in its results release.

These comments appear to have spooked investors. With revenues from stock trading already sliding, it seems as if the organisation’s appeal as a growth stock is evaporating. 

Considering all of the above, I wouldn’t buy Robinhood stock even as it slides. 

Robinhood share price drawbacks 

While I think the free trading model does have potential, it is not unique. Other brokers already offer this service, and I think it will only be a matter of time before it’s the industry standard. The company is also only one of many platforms investors can use to buy and sell digital assets. 

As well as the lack of any clear competitive advantage, it’s also hard for me to value the Robinhood share price. The company’s revenues jumped in the last quarter, but it isn’t clear to me this growth is sustainable. Further, the enterprise is still losing money. It’s already been bailed out once this year after running out of cash. That could happen again. 

Still, it’s clear to me Robinhood does have a devoted customer base. It’s also one of the most recognisable brands in the trading app space. These qualities could help the firm outperform its peers as we advance. And if it can outperform, then the Robinhood share price may offer value after recent declines. 

However, I’m struggling to work out how much the firm is really worth, which is why I’m going to stay away.