Robinhood M&A interest, stock upgrade explained

Robinhood wobbles

Robinhood’s reeling from a wave of good, bad and confusing news. It scored an upgrade from Goldman Sachs, which said yesterday that the worst could be over for the company’s slumping stock. But a recent congressional report suggested the crisis it faced during last year’s GameStop frenzy was worse than reported. Then there was the report that FTX was thinking of buying the company — which was quickly denied by FTX CEO Sam Bankman-Fried, who personally acquired a stake in the online broker this spring.

Robinhood had a near-death experience. The GameStop fiasco may seem like ancient history, but a House Financial Services Committee report shed light on how Robinhood nearly imploded during the trading frenzy.

• The January 2021 GameStop frenzy turned the spotlight on Robinhood’s “troubling business practices, inadequate risk management, and a culture that prioritized growth above stability,” according to the report by the House committee.
• In fact, things got so bad that Robinhood “was only saved from defaulting on its daily collateral deposit requirement by a discretionary and unexplained waiver,” the report said.
• Robinhood downplayed the report. The findings were “nothing new” and confirmed the company’s view that “January 2021 was an extraordinary, once in a generation event that stressed every stakeholder in the market,” Lucas Moskowitz, Robinhood’s deputy general counsel, said in a statement.

What amounts to good news is that maybe things won’t get any worse. After downgrading Robinhood’s stock to sell in April, citing a “lack of clarity around the path to profitability,” Goldman Sachs upgraded it to neutral on Monday.

• HOOD has already shed 29% since the downgrade and shouldn’t fall any further for now. “We now see a more balanced risk-reward,” the Goldman Sachs analysts told clients in a note.
• Rising interest rates may actually help boost Robinhood’s net interest income, and customer engagement based on trading volumes will likely stabilize. The analysts said they think Robinhood “has worked through a large part of the elevated churn” it went through following the GameStop frenzy.
• The report sent Robinhood shares climbing 14%, though it’s still under $10. Robinhood isn’t out of the woods yet, the analysts said: “Fundamentals are still very weak.”
• The company is also cheaper now, its market value is down to $8 billion. That’s probably why Wall Street got excited by chatter that FTX was thinking of buying HOOD. Bankman-Fried shot down the report, saying there are “no active M&A conversations,” despite his being “impressed by the business that Vlad [Tenev] and his team have built.”
• If FTX does want to have a chat about buying Robinhood, Bankman-Fried is smart to butter Tenev up. Robinhood’s CEO and his co-founder Baiju Bhatt control 63.3% of the company’s voting power, thanks to its multiple-class share structure.

What Tenev has built is a wobbly edifice, Rob Siegel of the Stanford Graduate School of Business said, pointing out that Robinhood’s revenue streams are seriously under pressure. Its “bread and butter” comes from day trading and crypto, which are not exactly robust markets right now: “Their core business is in a lot of trouble.” Given that, the bar for good news is low.

— Benjamin Pimentel (email | twitter)

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