A warning about Robinhood Stock

Let me use an example - your house is valued at 500k and you have 500k shares. Each share is worth $1. Your gardener comes in and asks for $100 and you tell him please take 100 shares of my house instead since it’s valued at $1 a piece. Assuming he can cash it in and get his $100. Now the handyman comes in the next day and asks you for $166. you are out of cash and decide to print 100k shares additionally. Now each share is worth $0.83 (500k/600k). So you pay your handyman 200 shares (if he had come the previous day you would have paid him 166 shares). The one who lost the most was the gardener since what he is holding on to is not worth 100 but 83. So existing employees and shareholders of RobinHood are the loosers since any new investor or employee might ask for a discount(lower price)

Now the counter argument would be what if the home price went up to to 600k from 500k. Well in that case even with the additional shares price is still $1. So in order to make money as shareholder not only should the valuation of robinhood go up but it should also make up for any additional shares that might be printed (since they are most likely not going to make large cash based payments)

Unless robinhood becomes the next Meme stock like AMC, Gamestock, etc and people invest purely on speculative basis just don’t see how purely on the basis of fundamentals how this company can survive. Even if another brokerage firm buys them they are most likely going to buy them at near current levels and not at historic high levels

The risk isn’t that they’re going to print shares and dilute the value of your shares. Public markets tend to absorb this dilution to some extent, it’s rarely a case that companies tank their own stock by issuing too many shares. The greater risk is that their stock price stays low and they can’t compensate their employees in a hot labor market, lose staff, and have to make cuts. Another concern is, how are they going to significantly increase revenues? They are unlikely to significantly increase their user base. How do they 2x revenues over the next year or two? Their fundamentals suck for a publicly traded stock. Hard to argue they’ll beat a simple index fund. Their peak validation was based on company hype / goodwill, not potential EPS.

RSUs are out of control across the whole industry

Increasing revenue aside are they profitable or have a road to get to profitability?

You can read this as a positive or a negative based on your projections for the business Positive : 1) This means that operating losses are not large. Most of the losses on the balance sheet are shared based compensation 2) This is going down by 35-40 percent as per management commentary. If stock prices go higher it will probably be lesser 3) If you break down the 3.6 billion accounted till Dec last year - 1.25 B is employee based compensation i.e executives and 3400 odd employees. 1.44 B is related to convertible notes that were issued in the meme fueled craziness last January - these notes were essentially debt that converts into stock. Possibly this was a one time event - Tesla had a similar type of share solution in the last 4-5 - it was near bankruptcy but was able to raise money by dilution and also keep issuing stock to Elon for reaching some predetermined goals - luckily for shareholders the revenue growth eclipsed stock dilution very quickly and now they don’t need to raise money anymore Negative : - If Robinhood does not execute, the share dilution can really make a big dent. - If share price goes lower their ability to raise money will also go down I believe in the overall fundamentals of the business so look at the positives. I think they are head and shoulders above the rest of the industry- they were pioneers for many features - fractional shares, crypto, zero commission and have a very exciting roadmap - wallets, trading hours, settlement, retirement, international, subscription that this dilution will be a minor thing if they execute. Most legacy brokers take 2-3 years for simple features because of legacy infrastructure and mediocre tech talent - Robinhood still attracts the best of fintech because of comp

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They also made a lot of rev off of crypto which has right now isn’t going to hot.

There’s a really simple way to not be in crap stocks while they’re crapping. For example HOOD, but also SQ, SE, SNAP lately…