Robinhood (HOOD) stock made an all-time high of $85 and has fallen 41 percent since then. The stock looks set to continue its plunge and was sharply lower in premarket on Aug. 19. Why is HOOD stock falling and should you buy the dip or sell at these levels?
Robinhood had a dismal listing and closed below the IPO price on listing day. The company priced the IPO at the lower end of the range at $38 but fell to a low of $33.25 before buying emerged. Several observers like Jim Cramer advised buying the dip, while Cathie Wood of ARK Invest loaded up on the shares, just like she bought Coinbase shares after the post-listing slump.
Why HOOD stock is falling
HOOD stock ran way ahead of its fundamentals at the peak. The rise was driven by speculative trading including rumors that the trading app might also get into the BNPL (buy-now-pay-later) market. The bullish narrative is unwinding now, which is leading to a fall in HOOD stock.
Talking specifically about the fall on Aug. 19, Robinhood warned of a growth slowdown in the second half of the year, which is leading to the steep fall in the stock. The company released its second-quarter earnings, its first as a publicly traded company, on Aug. 18 after the markets closed.
Robinhood reported revenues of $565 million in the quarter, which were 131 percent higher than the same period in 2020. The revenues were towards the upper end of its guidance of $546 million–$574 million. The company posted a net loss of $502 million in the quarter, which was within the guidance of a loss between $487 million–$537 million.
Robinhood’s crypto revenues spike
The company’s revenues from cryptocurrencies totaled $233 million in the quarter, which was more than half of the total transaction-based revenues in the quarter. A third of the cryptocurrency revenues came from Dogecoin but the company warned that if Dogecoin's trading volumes fall, it could have a negative impact on its earnings.
Robinhood also warned of a slowdown in the third 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 company said in the release.
Robinhood’s earnings weren't expected to move the stock much because it recently provided the guidance. However, management’s commentary on a growth slowdown and rising cryptocurrency revenues, which might not be sustainable, have dampened the sentiments.
HOOD stock forecast
Since HOOD was only recently listed, only four analysts are covering it. While analysts two rate the trading app as a buy or some equivalent, two rate the stock as a hold. Its median target price of $65 is a premium of over 30 percent above the current prices.
Should you buy or sell HOOD stock?
While Wall Street analysts have a bullish forecast for HOOD stock, I would be wary of buying the stock here. The stock could see selling pressure in the near term. Robinhood stock looked overvalued during the IPO and despite the crash, it still trades above the IPO price. The company faces several risks, including its business model, where it gets most of the revenues from routing customer orders to others.
With growth slowing down, HOOD stock looks even more expensive than it did at the IPO price. I would wait for the stock to fall more from these levels before initiating a buy position.