Attempts to assuage angry users have not helped the Robinhood [HOOD] share price, which continues to slump. Dismayed with its decision last year to restrict trading in GameStop shares [GME], investors filed a lawsuit against the zero-commission trading company.
Last Tuesday the company released a blog post outlining the steps it has taken to avoid imposing trading restrictions.
Robinhood became a household name before its mega IPO, when retail investors used the trading app to boost the Gamestop share price and other stocks to dizzying heights.
The meme stock rally caused online brokers to impose trading restrictions on some shares in 2021. It resulted in problems for several governments, as well as private lawsuits from angry customers and investors, which drew scrutiny from the SEC.
In a blog posted titled ‘January 28: One Year Later’, Robinhood, headed by CEO and co-founder Vlad Tenev (pictured above) shared the measures it has implemented to ensure that customers are never “surprised with trading restrictions again”.
The Robinhood stock price has been falling
Robinhood shares have plunged 21.5% since the start of the year, closing at $14.02 on 2 February, in stark contrast to its record high of $85 in August.
When the company came to market in July 2021 the Robinhood IPO price was $38, achieving a mega valuation of $31.8bn. Since its stock market debut, the shares were down 59.7%.
“Robinhood was one of the pandemic darlings. Almost exactly a year ago, it sat at the centre of the meme stock mania. And that has clearly cooled off as we headed into a new year,” said Art Hogan, chief market strategist at National Securities in New York.
“Robinhood was one of the pandemic darlings. Almost exactly a year ago, it sat at the centre of the meme stock mania. And that has clearly cooled off as we headed into a new year” - National Securities chief marketing strategist Art Hogan
The company believes it is in a ‘strong position’
The commission-free trading firm said on its blog that it is in a ‘strong position’ to support its customers through unlikely market events.
Robinhood said that its net capital position stood at $28bn, around 21 times the stipulated requirement by the SEC, putting the company in the ranks of the largest brokerage companies in the US.
In the blog Robinhood said it is on a hiring spree to strengthen its risk and compliance infrastructure as well as scale its tech offering to insulate the business when handling market volatility. It has increased the size of its customer support team and has introduced “24/7 support for all issues” so that it “can be there for our customers when they need us”.
What’s next for the HOOD share price?
Due to last year’s meme trading saga, the SEC has been closely inspecting the business practices of commission-free brokers, in particular payment for order flow (PFOF).
Robinhood derives a large portion of its revenue from PFOF and other transaction rebates. Any new regulation in this area could impact the company’s business model.
The threat of an SEC crackdown is an “overhang” for the stock, said Greg Martin, co-founder and managing director at Rainmaker Securities. “The market is not being very patient with them,” he added.
Dwindling investor interest in retail trading has hit the Robinhood stock price and the regulatory scrutiny of the company’s main source of income has not helped.
“They've got a global brand, which they basically did with zero marketing. Now, they need to create more long-lasting revenue streams that are more sustainable," Martin added .
“They've got a global brand, which they basically did with zero marketing. Now, they need to create more long-lasting revenue streams that are more sustainable” - Rainmaker Securities co-founder Greg Martin
Many analysts agree that the company needs to expand its offering in order to survive. Robinhood has expanded to allow customers the opportunity to invest in cryptocurrencies and buy into IPOs. It has also been testing a wealth management tool and has mentioned offering retirement accounts.
According to Marketscreener, the consensus rating on Robinhood shares is ‘outperform’. The average HOOD share price target is $21.77, a significant upside from the current level.
Jeff Tomasulo, chief executive officer of Vespula Capital Management, believes it will remain to be seen if the market will be patient. He said that “there’s not many brokers out there like Robinhood”, so as it “gets cheaper and cheaper” the company will become a “really good takeover target”.
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