Robinhood shares have melted and JP Morgan believes they will melt more

Robinhood shares have melted and JP Morgan believes they will melt more

Robinhood’s tide of bad news picked up on Tuesday, June 14th. American bank JP Morgan has lowered its stock trading platform’s target price expectation from $11 to $7 for the next 12 months. The reason? The company’s focus is getting in the way of the business itself.

Analyst Kenneth Worthington, from JP Morgan, maintained the sale rating of the company’s shares on the grounds that, by focusing the operation on small investors, the brokerage platform may not achieve competitive margins for a long time and become profitable.

The change in the stock’s target price followed the release of Robinhood’s financial results in May. Margins dropped nearly 20% compared to April and ended the fifth month of the year at $4.2 billion. At the same time, the number of users dropped 7% this month to 14.6 million.

“While the founders have leveraged innovation, courage and ideal market conditions to build a leading retail brokerage in the United States, we do not see growth as sustainable,” said Worthington, as reported by Barron’s.

To reverse the downward trend in users, the company even announced last month the launch of a digital wallet to allow users to access the NFTs and tokens market. The wallet will work independently of the main application and is expected to be launched by the end of this year.

Valued at $6 billion, Robinhood is facing a delicate moment on the stock market. The American company’s shares traded on Nasdaq have already dropped more than 60% since the beginning of the year. The drop since the IPO held at the end of July last year is even greater: almost 80%. Since the peak, in August, when the share reached US$ 70.30, the fall has been greater. The stock was down 89.7% and today closed at $7.20.

The main problem has been the scrutiny of regulatory authorities because of the practices that the company adopts to increase its revenue, such as the so-called payment-per-order flow. Technically, the practice involves paying up to 1 cent per share that a broker receives to route its clients’ trades to a particular market maker.

In practice, Robinhood bets on a model in which it receives a commission for directing the customer to someone (the market maker) who is liquidating the purchase of a stock. As it does not charge a fee, Robinhood earns only from these “commissions”.

The problem is that the Securities and Exchange Commission (the US CVM) does not look favorably on the practice and may make changes that would cause stock purchase orders to be sent to auctions, according to the Wall Street Journal. In this way, Robinhood would not be able to designate a market maker, which would imply in its “commissions”.

The company also began to face competition from other market giants. Last year, PayPal was preparing an offensive to create a platform aimed at retail investors.

Other financial results also indicate why the red flag is on for investors. On balance for the first quarter of this year, Robinhood’s revenue was down 43% to $299 million from the first quarter of last year.

“We are seeing our clients affected by the macroeconomic environment, which is reflected in our results this quarter,” wrote Jason Warnick, Robinhood’s CFO, commenting on the results.

Source: Neofeed

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