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Is Robinhood Doomed to Become a Penny Stock?

Robinhood's epic stock plunge continues. How far can HOOD shares go?

Robinhood  (HOOD) -  investors have reason to be worried. Shares of the commission-free broker have been tumbling basically since the stock's IPO. The company has struggled to reach profitability and is reporting slow growth.

HOOD has already fallen more than 80% since its peak in July 2021, when it hit $55 per share. Also, in its recently Q1 earnings, Robinhood reported a drop of more than 43% in revenues, which caused the stock to plunge more than 10% after hours.

However, although the stock suffers a lot of resistance — mainly from retail investors who have an aversion to its business model — is Robinhood really destined to become a penny stock?

Figure 1: Is Robinhood Doomed to Become a Penny Stock?

Figure 1: Is Robinhood Doomed to Become a Penny Stock?

(Read more from Wall Street Memes: GameStop Stock: Ryan Cohen's Clever Plan To Limit Shareholder Dilution)

, its short history of operations, difficulty in managing accelerated growth, and fluctuations in financial results from quarter to quarter are the main risks to its Robinhood stock.

But among these risks, there is one that draws a lot of attention: the dependence of Robinhood's revenues on payment for order flow (PFOF) — a practice that allows the company to "opt out" of charging commissions to its customers.

is compensation received by the brokerage firm from different parties for its execution. It usually consists of a few pennies per transaction received for routing the order to a market maker.

The practice has been criticized because of possible conflicts of interest among market makers. There are theories that the practice of PFOF can turn executable orders into non-executable ones, due to being routed to market makers who are willing to pay a higher amount. This can possibly have an impact on the share price of an asset.

PFOF is illegal in Canada, the U.K. and a few other countries. Initially, the practice was endorsed by the controversial market maker Bernie Madoff, who pioneered its adoption. Today, besides Robinhood, many other brokers also use PFOF, including TD Ameritrade (AMTD) - , Charles Schwab (SCHW) - , and E-Trade (ETFC) - . There is also a benefit of increased liquidity of the markets with the use of PFOF by the brokers.

However, an eventual ban of the practice — which is neither unthinkable nor unfeasible — would be strongly detrimental to Robinhood's revenue model. Retail investors who bet massively on meme stocks like GameStop (GME) -  and AMC (AMC) -  have a strong aversion to the practice of PFOF. They consider it an attack on the transparency of the markets due to market makers supposedly being the biggest beneficiaries.

In Summary

Robinhood is still a long way from reaching the level of a penny stock. But it is undeniable that its performance since its IPO in mid-2021 has been tragic.

However, the company still has about $6.4 billion in cash, excluding debt. This is crucial for financing new projects and to take steps toward restoring growth to its business and achieving profitability as soon as possible.

There are several risks that could bring Robinhood's business down in a short period of time, such as its dependence on PFOF. But on the other hand, there are also good opportunities and methods to monetize its large user base. So, even though I view Robinhood's business with a lot of skepticism, I believe it is unlikely that the company will ever reach a penny stock valuation.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)