Robinhood Stock Relies Too Heavily on Crypto and Options to Be a Good Buy

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The commission-free retail brokerage platform went public on July 28. On its first day of trading, Robinhood (NASDAQ:HOOD) stock lost 8.4% of its value, closing below its $38 IPO price. Ever since, HOOD stock has mostly been on fire, experiencing more up days than down. 

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However, it was the Aug. 4 jump from $46.80 to $70.39 that’s helped create its 31% return in less than a month as a public company. 

It has since fallen to Earth and trades today back around $49.

Can it possibly keep up this pace? Maybe. I’ll look at both sides of the argument. Clearly, on whichever side you find yourself, Robinhood is a lightning rod for retail investors. 

Typically, when a company goes public, insiders must hold on to their shares for between 90 and 180 days before selling. In the case of Robinhood, the restricted period is 126 days — described on page 281 of its IPO prospectus under “Lock-Up Agreements” — but there are several exceptions to this restricted period. 

For example, 6% of the pre-IPO Class A common stockholders could sell 50% of their shares immediately, facing no lock-up period.

However, because the 47.96 million shares issued for the conversion of Tranche I convertible notes sold by the company in February to meet the collateral requirements of the National Securities Clearing Corporation (NSCC), the sale of these shares first have to be registered under the Securities Act.

Once the first 47.96 million shares are released for sale, the second equal amount will also be available for immediate sale.

Insider Shares and Hood Stock

Another 10.96 million shares were available for sale on July 29. Again, general employees and directors hold these shares. On the 91st day after the July 28 IPO prospectus, another 10.96 million shares are available for sale. Once again, these are shares held by general employees and directors. 

On Aug. 18, Robinhood delivered its first earnings results as a public company. That date is significant. It’s part of the conditions necessary to release up to an additional 97.8 million shares. To reach that number, it will have to trade at $57 or higher for nine of 14 consecutive trading days leading up to the 90th day after its July 28 IPO.

In addition, the founders and CFO will be able to sell 6.62 million shares on the 90th day after the prospectus. 

On the 126th day after July 28, 565.15 million shares yet to be released are available for immediate sale. 

So, this means approximately 28% of Robinhood’s outstanding shares will be available for sale well before the 126th day. Whether or not a majority of them choose to sell will have a big influence on the trajectory of its share price in the next few months. 

However, as Fortune reported, the 19 institutional investors who stepped in to save the company in February have a right to monetize their investment earlier. It’s the least the company could do. 

More Crypto Than Stocks

In its second-quarter results, its transaction-based revenues accounted for almost 80% of its overall revenue of $565.3 million. Of that $451 million in transaction-based revenue, 52% was related to cryptocurrencies. The trading of options accounted for another 37% of transaction-based revenue. Equities accounted for the remaining 11%. 

You can look at this in one of two ways. 

Either you believe that Robinhood is becoming a more well-rounded investment platform, or you think the whole idea of it “democratizing finance for all” is nothing but a load of malarkey.

Of the company’s non-transaction-based revenue, $68 million is from net interest, including securities lending (shorting), margin loans, and interest on segregated cash from securities. Another $46 million is from Robinhood Gold, the company’s monthly paid subscription for professional research, Nasdaq Level II market data, etc. 

Now, if you take all of its equities-related revenue — my estimate puts it around $328 million in Q2 2021 or 58% of its overall revenue equities accounted for 97% of its $244.2 million in overall revenue in Q2 2020. 

From where I sit, Robinhood appears to be becoming a cryptocurrency platform rather than something dedicated to helping regular investors buy stocks cheaply or efficiently. 

Further, if you exclude the options revenue it generates — at some point, regular investors will realize that options aren’t for the faint of heart — Robinhood’s almost entirely a cryptocurrency platform. 

If you follow Wealthsimple in Canada, you will know that it too has gone down the cryptocurrency road. And while it’s merely responding to the wants and needs of its customers, it better pay attention to what’s happening at Robinhood. 

If you think Robinhood cares about its stock-buying customers, think again. What was once a stock-buying platform has become something entirely different. 

The Bottom Line on HOOD Stock

If crypto is your thing, I recommend you consider buying Coinbase  (NASDAQ:COIN) instead of Robinhood. It’s the pure-play in this twosome. 

And if you want to own a small slice of a company offering commission-free, fractional share ownership, I’d consider Square (NYSE:SQ) or SoFi Technologies (NASDAQ:SOFI) as better alternatives. 

Look, Robinhood is making money on an operational basis, so it’s not the worst bet in the world by a long shot. 

However, it’s no longer the industry crusader it once was. Perhaps it never was. With every passing day, it’s becoming just another crypto play.

And you can do better on that front.       

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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