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The Ratings Game: Robinhood shares are now 75% below last July’s IPO price after job cuts announcement, but analysts are unfazed

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Shares of Robinhood Markets Inc. sank to a fresh low on Wednesday, after the online-trading platform said it’s cutting 9% of its workforce after a rapid expansion that started in 2020 when stay-at-home workers started using it in droves.

The stock
HOOD,
-4.00%

fell more than 5% to hit a low of $9.38 that puts it more than 75% below its issue price of $38 when it went public last July. Shares touched a high of $85 after the initial public offering, but have been in free fall so far this year, declining 47% so far in 2022 as the S&P 500
SPX,
+1.41%

index has dropped 12%.

From the archive: Five things to know about Robinhood as it goes public

CEO Vlad Tenev wrote in a blog post Tuesday that the company had grown its workforce to nearly 3,800 since the beginning of 2020 from 700 before that, as the company’s trading app increased in popularity.

“This rapid headcount growth has led to some duplicate roles and job functions, and more layers and complexity than are optimal,” he wrote. “After carefully considering all these factors, we determined that making these reductions to Robinhood’s staff is the right decision to improve efficiency, increase our velocity, and ensure that we are responsive to the changing needs of our customers.”

Analysts weighing in on the news were relatively unfazed by the news.

Mizuho’s Dan Dolev, who rates the stock a buy, said layoffs are hardly a good sign, “but bringing costs back down to earth is a positive.”

The company’s hiring spree of the last few years “was outsize to begin with,” he wrote, growing 80% between March and December of 2021.

Comparing efficiency to the company’s peers or payments companies “shows that HOOD’s revenue/employee stats are low,” he wrote. “As our analysis below shows, trimming the cost basis should bring its efficiency metrics more in line with peer levels.”

Morgan Stanley said there are three key implications of the job cut announcement; they show a continuation of management’s tone and focus on sustainable customer monetization and profitability, after a period of growth at all costs; they are a recognition of a weak revenue backdrop that’s unlikely to shift much in 2022; or they are an acknowledgment that lack of profitability is a key investor concern.

“Post our initiation, we heard concerns expressed from investors questioning the long-term viability of a business model that remained unprofitable during a period of peak retail engagement with supportive macro tailwinds,” said analysts Michael J. Cyprys and Chuma L. Nwankwo.

The analysts now expect Robinhood to become profitable on an adjusted EBITDA basis in 2023, “and today’s announcement gives us more confidence in those estimates, with potential for that timeline to be accelerated in the context of a rising rate environment that should support net interest revenues.”

Adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, is an adjustment of an already adjusted number that has little to do with actual profit.

Morgan Stanley has an equal-weight rating on the stock.

JMP Securities analysts reiterated their market perform rating on the stock and said they wouldn’t read too much into the news.

“We believe the key factor to consider, which we have not seen much focus on, is whether or not the cuts are a related to a larger expense/ strategic restructuring, which would in fact imply more of a strategic shift or defensive position,” wrote analysts Devin Ryan and Brian McKenna.

They do not believe that to be the case and expect the cuts to generate minimal savings to the company’s overall operating budget.

“Bottom line, we remain focused on Robinhood’s product execution as the evolution toward its vision of a single money app is not a short term initiative, and we believe datapoints around its progress (or not) will be the biggest determinants of long-term value in a massive addressable market,” they wrote.

Robinhood is due to report first-quarter earnings on Thursday after the close and will likely face more questions then.

The company lost $423 million, or 49 cents a share, in the fourth quarter, contrasting with net income of $13 million, or 2 cents a share, in the fourth quarter of 2020. Sales rose 14% to $363 million, the company said.

FactSet consensus called for a loss of 35 cents a share on sales of $376 million.

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