After one of the most heavily anticipated IPOs of 2021, Robinhood has endured a tumultuous introduction to public life. With the emergence of formidable competitors and regulatory scrutiny of the company’s payment-for-order flow model, the value of HOOD shares has fallen some 40% from its $70 peak in early August. Now it’s worth asking whether the stock can recover its early success? 

Despite the difficulties that Robinhood faces in the near future, it’s worth remembering that the company is showcasing strong fundamentals, and is currently trading a healthy 20% above its opening share price on the NASDAQ - albeit after a lowering of expectations ahead of its IPO in late July. 

The arrival of HOOD on Wall Street was met with the sort of volatility that the online brokerage has become synonymous with following the role that the platform played in the short squeezes of both GameStop and AMC earlier in the year. 

After a significant volume of early market sentiment towards the stock, the price of HOOD shot up to a peak of $70.39. However, as interest cooled, Robinhood was met with increasing levels of SEC scrutiny over the company’s controversial payment-for-order flow business model and the revelation that both PayPal and Revolut were planning to launch competitor platforms. 

(Image: CB Insights)

Despite this, Robinhood has been one of the best performing online brokerages in the wake of the Covid-19 pandemic, with monthly active users sprawling to totals of 20 million in early 2021. So, with this in mind, could Robinhood’s falling price equate to a buy opportunity for investors? Let’s take a deeper look at one of the most curious new stocks of the year: 

Fighting Off Competitors and SEC Scrutiny

Robinhood’s stock price has been sliding in the wake of a series of troubling pieces of news regarding regulatory action, the emergence of new competitors and the release of more shares onto the market. 

In early September, the platform was hit by news that the US Securities and Exchange Commission was considering banning payment-for-order flow (PFOF) - a practice that enables brokers to offer a ‘zero-commission’ operating model by selling their orders to the highest bidding market makers. SEC Chairman Gary Gensler labelled PFOF as “an inherent conflict of interest” due to the advanced notice that the practice provides market makers surrounding trading activity. 

The stock was later dealt a blow as it was revealed that platforms like PayPal and Revolut were looking to expand into the retail investing space - a market that Robinhood has become a dominant force in the US. 

At the end of September, JP Morgan issued a worrying warning that shares in Robinhood may be set to drop a further 22% in 2021 ahead of the ‘big unlock’ on December 1st when 500 million shares will be freed up. The analysts subsequently gave the company an underweight rating with a $35 price target - which is around 22% lower than its current price. 

Motley Fool contributor, Matt Frankel, also expressed concern at Robinhood’s fundamentals. Whilst acknowledging the company’s impressive growth, Frankel noted that “of their transaction revenue, 90% comes from either cryptocurrencies or options. Only about 10% of it comes from stocks. My question is, is that sustainable? 51% of the revenue, to be specific, came from cryptocurrency trading. 34% of that came from Dogecoin, by the way.”

Dogecoin enjoyed a blistering start to 2021, rallying as much as 12,000% at its peak before shedding some 72% of its value. With this in mind, it’s logical to question the sustainability of Robinhood’s strong active user base. 

Could Robinhood Recover to Recapture $70?

Despite its difficulties in the market, Robinhood’s found a formidable fan in the form of Cathie Wood, whose asset management company, Ark Invest, bought up some 4040,020 shares in HOOD in the wake of the stock’s latest downturn in September.

Wood’s confidence in Robinhood appears to stem from her belief that the app’s payment-for-order flow system is simply too beneficial for all parties to be stopped by the SEC. 

"We actually think that not much is going to change there, because the system has been so good from an execution point of view for the end investor,” Wood explained. “So we'd be surprised to see a lot change on that front. But again, we're in a situation where we have to listen to what the SEC is saying."

Maxim Manturov, head of investment research at Freedom Finance Europe, shares Wood’s more optimistic assessment of Robinhood’s future: “Robinhood's long-term prospects remain positive. Even with these short-term concerns, Robinhood is well placed to create long-term value. It is important to note that real interest rates in the US have been negative for an extended period. This is important because negative real rates contribute to higher trading and speculative activity in asset markets.” 

“This is good news for Robinhood, which has positioned itself as the preferred trading platform for young investors. It is worth noting that the company reported 21.3 million monthly active users (MAU) in the second quarter. Compared to the same period last year, its MAUs have increased by 109%. Moreover, Robinhood has announced that cryptocurrency wallets will appear in the app, which is a convenient solution,” Manturov added.

Robinhood may also receive a boost as the company deepens its relationship with cryptocurrencies, introducing its own crypto wallet for its users. This is likely to strengthen the platform’s hold on digital assets, helping the platform to become more synonymous with the world of Bitcoin, Ethereum and even Dogecoin. 

In the short term, there are certainly some big tests coming up for Robinhood, but the platform has managed to continue to thrive under years of intense scrutiny. It may be worth considering that the company is in the hands of a team that has its sights set on long-term growth.