A warning about Robinhood Stock

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lendhand

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lendhand
Jan 30 24 Comments

Original source: Reddit

I've been scoping out growth stocks that have been demolished recently to try to find hidden gems, so I decided to look into Robinhood. As bad as their earnings report was recently, there's an even worse badness hiding in their numbers.

Even though their revenue for the year was 1.8 billion. Their share-based compensation was almost 1.6 billion. Based on their current market cap, that's about a 14% dilution. Also they're projecting this upcoming year to have a share-based comp of between 0.93B and 1B. This is palantir level dilution with a shaky business model. If you're buying this right now, you should hope they get bought by a larger brokerage firm. Buyer beware.

Edit: For those interested in the source, go to page 4 of their earnings release for their 2022 projections. "Additionally, we expect share-based compensation to decline 35-40% year-over-year. " That decline is coming from a share comp of 1.6B.

I’m not super familiar with how dilution works. Could any of you explain it, please?

Thanks!

Robinhood
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 TOP 24 Comments
  • PayPal
    cooldud68

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    cooldud68
    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)
    Jan 30 7
  • Infosys
    emeraldk

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    emeraldk
    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
    Jan 30 0
  • PayPal
    cooldud68

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    cooldud68
    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
    Jan 30 2
    • Meta
      techstonk📉

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      techstonk📉
      The meme stock crowd hates Robinhood. It’ll never happen
      Jan 30
    • New
      d9jad82x

      New

      d9jad82x
      What changed about Robinhood’s fundamentals from when they planned to IPO compared to now? My question is if the fundamentals of the company are dire right now, and may not survive, was this something they could’ve anticipated/known during IPO? If so, would you say they went ahead with the IPO for liquidity/cashing out?
      Jan 30
  • HBO
    It’s TV

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    BIO
    Username is an insult for Jonah Ryan (Veep!) that didn’t make it to air.
     It’s TV
    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.
    Jan 30 1
  • PayPal
    cooldud68

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    cooldud68
    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)
    Jan 30 0