Robinhood Takes a Nosedive

Usually, we’d take the most “prominent” earnings in any given day for our top story. However, there’s just one story we cannot ignore today. Robinhood’s down 12.2% in afterhours because of earnings-related antics… (sorry Apple!)

Robinhood has been in decline for months. So what’s with this collapse? 🤔 Here’s the post-mortem from today’s earnings report:

Revenue: $362.7 million, +14% YoY (analysts expected $370.9 million)
Earnings loss per share: -$0.49 per diluted share (analysts expected -$0.45)
Net loss before income tax: $420 million, -2,310% YoY (analysts expected $362.1 million)
Monthly active users (MAUs): 17.3 million (down from 18.9 million in Q3; analysts expected 19.8 million.)

Those four bullet points pretty much outline everything wrong with Robinhood — things are going in the wrong direction. The company’s stock price makes that abundantly clear. 💀

Robinhood hopes it can turn its stock around with the long-awaited launch of crypto wallets. The platform presumably plans to add more pairs to trade than legacy cryptos, sh*tcoins, and Bitcoin/Ethereum. After all, transactions are how Robinhood makes most of its money. The problem is that equities and crypto-related trading are just not hitting like they used to, and the company is leaning on its options trading transaction revenues as a crutch.

Even then, everything about the company is behind where it was when the retail revolution was in vogue. That’s why the next two quarters could continue to test Robinhood’s (and its investors’) patience. The company will face its most aggressive comps in recent history in Q1 and Q2 (remember GameStop and Dogecoin?) 

With that said, if investors like Robinhood at $85, they’ll probably love it at suppressed price points. It’s too early to call a bottom, but with the company worth less than $10 billion, it’s not out of the question that Robinhood could stage a recovery — or potentially get acquired by a large legacy player looking for a way to step into the fintech world. (Until we see more action, we’re betting the latter might be true.) 🎲

$HOOD is down 66.6% since IPO. Oof. 

The Fed announced yesterday that interest rates are going up, and now the stock market’s going down… but why?? What the heck does the Fed have to do with interest rates, anyway? 🤔

For the unacquainted who’ve seen us talking about the importance of the Fed for a year, our obsession with interest rates might seem like infatuation. 😍 But that’s because interest rates affect many aspects of life in a country, its economy, and its markets. Let’s examine why:

• The Federal Reserve controls the federal funds rate (this ‘interest rate’ JPow talks about), which is the target interest rate at which commercial banks can lend their reserves to each other. A bank’s reserves describe the cash that banks have to keep in actual vaults to make sure they have enough liquid money to satisfy a large withdrawal. The federal funds rate is important because it affects unemployment, economic growth, and inflation in the U.S. 🚨
• The federal funds rate affects other interest rates that you may be familiar with, such as interest rates on home or auto loans. 🚗 🏡Why does this relationship exist? Well, because the interest rate at which you have to pay back your car loan depends on the bank’s individual rate for you (this is known as the prime lending rate), and your individual rate is directly related to the federal funds rate.
• You probably heard yesterday that the Fed is going to ‘reduce its balance sheet’ and ‘raise rates.’ When the federal funds rate is low, it encourages people to invest or take out loans (because you have less interest to pay back.) That’s why the Fed lowered rates during the pandemic in an effort to incentivize people to participate in the economy in spite of lockdowns. The Fed also started buying bonds and other securities — ‘increasing the size of its balance sheet’ — in a process called quantitative easing to help lower interest rates.
• Although lowering rates and increasing asset purchases was an appropriate short-term monetary response to the pandemic-era economy, low rates and printing lots of money causes inflation in the long run, which is where we are now.
• So if raising rates helps combat inflation, why is the stock market reacting negatively? Because higher interest rates raise borrowing costs, disincentivize hiring, increase credit card rates, and generally slow down the economy (at least, temporarily.) And when the economy slows down, bonds become more appealing investments because they’re less risky — so investors are selling or switching to bonds to avoid losing money. 💡

At the end of the day, the Fed is reacting to inflation in a way that’s historically appropriate. The market just isn’t happy because, in the words of JPMorgan analyst David Stubbs, “What the market doesn’t like, is rapid changes in the monetary landscape.” 🤷

Boeing has reportedly begun planning for its next-generation airplane. The design could mark a departure from the aviation industry’s reliance on “tube-and-turbofan” design. ✈️

According to Bloomberg, Boeing is in the extremely early days of developing the new airliner. Boeing’s European competitor, Airbus, is reportedly considering a fleet of hydrogen-powered aircraft, while engine players such as General Electric and Rolls Royce are trying to stay relevant by working on “several futuristic engine technologies” that would cut fuel consumption to the score of double-digits.

Ultimately, new designs might be a “wait and see” for Boeing, which claims the company is “not resting and standing still.” Novel, unproven technology could be a risky choice for a company with a record of building planes that fall out of the sky and cutting quality assurance corners. 😬 On the other hand, an innovative, game-changing solution for airlines could revolutionize the industry, putting Boeing’s star back in the sky. 🌟

$BA is down 3.7% over the last year. The company has gained just 16.8% in the past five years.