Robinhood (NASDAQ:HOOD) will probably have a down quarter in terms of revenue growth and potentially even a net loss. One reason is that in Q2 crypto trading was a big portion of its revenue. But this might mean it is a good time to accumulating HOOD stock.
Since Aug. 3, the stock has fallen $4.90 from $46.80 per share to $41.90 as of Friday, Oct. 1. That is a decline of a little over 10%, but there could be more to come.
Where Things Stand With Robinhood
On Aug. 18, the company released its Q2 results for the quarter ending June 30. It showed that Robinhood made a net loss of $502 million on revenue of $565.3 million.
However, one thing to consider is that of this total revenue, cryptocurrencies played a huge part. This could change the way the market views its Q3 revenue composition and going forward.
Note 3 of Robinhood’s 10-Q filing on page 13 shows that cryptocurrency transaction-based revenue was $233.1 million. That made up 51.7% of its total $451.2 million in transaction-based revenue ($67.7 million in interest and $46.5 million in other accounted for the rest of revenue). So, of total revenue cryptos accounted for 41.2%. Any way that you look at this, crypto trading was a huge portion of Q2 revenue.
There are now indications that crypto trading faded away in Q3 just as fast as it spiked in Q2. Some analysts have noted that the volume of crypto trading has subsided in Q3 vs. Q2.
For example, one Seeking Alpha contributor points out that Dogecoin (CCC:DOGE-USD) trading is down 80% in Q2. According to its 10-Q (page 106), 62% of Robinhood’s cryptocurrency transaction-based revenue was attributable to transactions in Dogecoin.
Here’s the problem. Dogecoin has fallen from around 25 cents on June 30 to 20 cents on Sept. 30. Over the quarter it has been mostly flat, although in the middle of August it jumped to a peak of 35 cents, up 40%.
This could be a harbinger of bad news for Q2 if Robinhood’s transaction-based revenue deflates a good deal in Q3. And it’s not as if Robinhood didn’t warn about this, as I showed on page 107 of its latest 10-Q.
Where This Leaves HOOD Stock
A good deal of this bad news is probably already in the stock price. I suspect. However, the company made a huge gain in cash flow last quarter, mainly as a result of much lower receivables from users. There were mostly buying in Q2.
This can be seen in the company’s cash flow statement on page 8 of the 10-Q filing. It shows that receivables fell from a negative $2.1 billion last year to $770 million in the first 6 months.
However, in Q3 that could potentially have reversed. If trading was mostly selling from people ditching Dogecoin and other cryptos, then cash flow could have turned hugely negative.
In fact, it may take another quarter or two for the crypto effect on its income and cash flow to subside. This assumes that crypto trading does not spike again, which it could easily do so.
As I said, a lot of the bad news is already in the stock price already. But, as usual with the markets, the price could fall further especially when earnings are announced. So be prepared at this point to see another leg down for HOOD stock.
At that point, I think it might be worth accumulating more of the stock once it declines further. However, by next year, 8 analysts forecast revenue will rise almost 35% from $1.99 billion to $2.68 billion, according to Seeking Alpha.
At today’s market cap of $35 billion, that puts HOOD stock on a forward price-to-sales multiple of over 13 times. That is pretty rich a valuation right now, especially if revenue is expected to fall in the next quarter.
Therefore, for most investors, it makes sense to wait to buy the stock at a cheaper price.
On the date of publication, Mark R. Hake held a long position in Dogecoin but not in any other security mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
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