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Is Robinhood a Prime Target for Acquisition During Weak Markets?

Whether or not Robinhood ($HOOD) is acquired by FTX, (the crypto exchange owned by billionaire Sam Bankman-Fried), or it attracts another suitor or remains a publicly-traded company, there are some things investors should know. Yesterday, a Bloomberg article suggested FTX is exploring whether it might be able to acquire Robinhood Markets, Inc. (June 27); they already own 7.6% of the company. Sam Bankman-Fried denied having interest. But, there is still some surprising data that investors in the company and users of the brokerage app should be aware of, as it could impact future price moves.

The investing app paved the way for free online trading, it then became a public company almost a year ago. At the time, there was still a strong wave of new investors eager to profit from the bull market in stocks and cryptocurrencies. The share price for the initial public offering came out at $38. By year-end, HOOD sank to about $18 per share. It is now trading near half the level it was at the beginning of 2022.

The company went public with a market value of $32 billion; it now has a total market cap of $7.8 billion.

Source: Koyfin

Robinhood Markets’ decline in price has been dramatic. The brand is well recognized, and the userbase, though shrinking, is more loyal than others. If it has lost customers, they were primarily the recreational investors and lower value users. Regardless, client trading is down; revenue for the most recent quarter was $299 million, or near half of what it was when Robinhood went public. Stimulus checks that in many cases were used to initially fund retail trading accounts are no longer being sent by the government; in fact inflation, in part caused by stimulus programs, may be the reason many are closing their accounts to reallocate the funds to necessities.

Many of the employees that found motivation in their own equity stake after the public offering have seen their valuations plummet. They might welcome a buyout. Using Morgan Stanley’s (MS) 2020 purchase of E*Trade Financial as a rule of thumb, Robinhood could be worth five times revenue, or $8 billion. One key employee that may wish to cash out as earnings have been trending down is Robinhood’s founder Vlad Tenev. His incentive package is tied to the price per share. To reach his maximum payout of $4.7 billion, HOOD shares would have to go from the current $9 range to $300 per share. As this seems unlikely, the founder may wish to cash out as high as possible and move on.

Other companies, if they served Robinhood’s customers, may be able to capitalize on synergies. According to Bloomberg’s story on FTX, a cryptocurrency exchange founded by Sam Bankman-Fried is considering how to make a bid. Today, an email by SamBankman-Fried, says he is not. But this does not mean the app isn’t attractive to suitors. Two other firms that could make good use of Robinhood’s retail traders (according to Reuter’s) are Goldman Sachs (GS) and JPMorgan (JPM), to complement and distribute their various savings and wealth products.

A buyer would still need optimism and confidence. Robinhood’s revenue mostly comes from paid-order
flow. The Securities and Exchange Commission suggested this source of revenue has potential conflicts of interest. Still, only 12% of the company’s top line comes from selling trade orders. Another activity that has recently slowed is trading in cryptocurrency. When added, it was expected to be a source of growth.

Take Away

Robinhood benefited from the upward momentum of the markets and went public at a great time to capture a very good price for the company. The markets have weakened, and the value of the company may have reached a point where a stronger company with enough synergies may target it to make the acquisition worthwhile. Despite the denial by FTX, acquiring companies is a cat-and-mouse game, don’t count anyone out.

Paul Hoffman

Managing Editor, Channelchek

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