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Why Robinhood stock is having such a tough week

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JMP Securities Director of Financial Technology Research Devin Ryan joins Yahoo Finance Live to discuss the outlook for Robinbood amid its recent stock slide.

Video transcript

BRIAN CHEUNG: We're going to move on topics right now to another stock that actually might be in a similar vein, but Robinhood. Shares of Robinhood, by the way, guys, this week are down almost 12%. And there has been a lot of news been going on over the week, including some news yesterday that Cathie Wood's Ark funds would be putting some money into Robinhood or already put money into Robinhood, but obviously, a very noisy stock.

So for a little bit more on this, let's bring in JMP's Devin Ryan, who covers the stock over at JMP. Devin, it's great to have you on the program. You know, in October, you guys had a, I think it was a $58 price target on the stock. But again, a lot of volatility over the past few trading days. What's going on over there at Robinhood? What do you think is the big story for them, especially as they try to figure out their footing in the brokerage market?

DEVIN RYAN: Sure. Well, first off, great to see everyone here. I think we need to distinguish between two things-- the technicals and the fundamentals at Robinhood. And something that I'm not sure is fully out in the market, but it's very important is, they've had really huge shares unlocked over the last month. And what that means is that, essentially, when they went public, there was 70 million shares that were tradable. And today, virtually the entire 600 million plus shares are tradable.

And so you've had these unlocked dates occurring, really, over the last month, with the last one being yesterday. So, you know, that doesn't necessarily mean that there's insiders or others that are selling. But what it does mean is that there are more shares that can be sold. And so, to me, that's a big technical dynamic that many stocks, when you go through an IPO, you have that process.

And so, we're kind of through the process now. It just-- kind of the final unlock just happened, as I mentioned, on the 1st. And so, that's technical. And so I think that's created an opportunity here on the stock, where some of the selling pressure has not been because of what's happening in the business. So that's the first point.

The second point is, OK, well, what's happening in the business? And I think the last data point we received on third quarter earnings was a little bit disappointing. You know, they had a slower third quarter. And then they talked about if these trends continue, fourth quarter could be a little bit disappointing.

And I would just say that the fourth quarter, it hasn't snapped back dramatically, but it is tracking, I think, better than how they framed it. So a couple of data points in there, equity trading volumes we believe are tracking up, probably a little bit over double digits quarter to date. Crypto volumes are up quite a bit, even without having Shiba on their platform. And so, when they're projecting revenues to decline, I think that things are actually going a little bit better there than maybe people appreciate.

And the last point is the new account growth, we're still tracking below kind of those record levels of the first half of this year. But we're tracking ahead of the third quarter by about 20%. So, it's the technicals and the fundamentals. But I would argue the last week and some of this kind of sloppy trading has been more technically driven, which you can create an opportunity for people that have a longer term outlook.

BRIAN SOZZI: Devin, what's the regulatory risk to Robinhood next year? I've had a couple of folks tell me that regulators might clamp down on them at some point next year. But what would that even look like?

DEVIN RYAN: Sure, well, I think there's a couple of things. There's their payment for order flow, which is a big driver of their revenues on the transaction side of the business model. And then there's regulatory uncertainty around kind of how the whole crypto space evolves from here. And that's not just a Robinhood story.

In terms of the payment for order flow, you know, our argument has been be careful what you wish for, because Robinhood ultimately is in a position where, you know, they could internalize their trading, in our opinion, and actually be even more profitable. And they may look to do that, anyways, whereas a lot of the smaller brokerages in the space, you know, they make the majority of their money also on payment for order flow.

But removing payment for flow or making it more difficult to receive at the brokerage level could really hurt some of the smaller businesses in the space. So Robinhood, you know, I think has a lot of options around this part of their business that people maybe don't fully appreciate. And there are plenty of firms that internalize their trading flow. And that's fine to do. But you can really only do it if you have scale, which Robinhood does. So that's one point. So we're watching what regulators may do on payment for order flow, but we think they have a lot of options.

And then in terms of the crypto space, and we spend a lot of time looking at where that world is going. And there's just such dramatic innovation happening right now. It's probably the most exciting part of our coverage. And, you know, it is an area where there's plenty of uncertainty, but I also would argue that the regulators at this point are going to have to put sensible regulation around it.

But they can't stop it because there's just too much momentum. There's too much money behind it now. And in our opinion, it really does have a good outcome for the end users in a lot of the use cases that are developing. So I think that Robinhood's going to have a big opportunity in that space as well.

BRIAN CHEUNG: Devin, as a follow-up, I mean, what about the competitive landscape, though? Because if you talk about some of those regulatory headwinds, one thing I think about is that your competitors are a much larger scale and have other places to subsidize if payment for order flow does end up being changed by the SEC, when you think about Morgan Stanley and E-Trade, as well as TD and Chuck Schwab. Do you think that also provides any sort of kind of guidance on where the trajectory over the longer run in the competitive space is for Robinhood?

DEVIN RYAN: Yeah, so I think it's a good question. A couple of points there. First and foremost, Robinhood is not looking to be a brokerage and only a brokerage. I think, obviously, they're viewed as a brokerage because that's where they started the business model. They really aspire to be the single money app. And, you know, Robinhood didn't get to 22 million customers by accident. They got there because they delivered a platform that people really enjoy using. And they built it with customer feedback and customer input.

And so, that's what they're doing across the rest of the platform, where they're adding new products and services beyond just brokerage, cash management, IPO access. There's obviously what they're doing on the crypto side. And there's numerous more. And that's ultimately, I think, the end state here, that you have a business model that helps customers optimize their entire financial life, not just their brokerage account. And again, people have tried to be dismissive of Robinhood's, I think, platform, really, from the beginning. And every time they do, they underestimate the firm. And so, you know, that's the first one.

The second point is I just go back to what I said about payment for order flow. I think that there may be some changes that could come. Robinhood has options here, including the ability to internalize their trading flow. And that could actually be more lucrative to them. So I think regulators also understand that, which is why payment for order flow is allowed and, you know, why it's a very competitive business on the market making side. And so, you know, there may be changes there. But, you know, Robinhood, to me, is not the one that puts it most at risk for that. I think a lot of the smaller firms in the space would be more negatively impacted. And that's kind of the negative unintended consequence.

BRIAN CHEUNG: All right, Devin Ryan, director of fintech research at JMP Securities, a citizen's company. Thanks so much for stopping by today.

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