Robinhood once appeared destined to dominate the retail investing landscape. The platform’s payment-for-order flow framework coupled with revolutionary levels of access to assets like cryptocurrencies and even IPOs gave the impression of a platform that had ambitions to truly ‘democratise finance for all.’ However, 12-months on from its Nasdaq debut and the company’s stock sits more than 75% adrift from its opening price. Now, as rumours of an FTX acquisition surface, it appears that a buyout is the only logical option for the embattled brokerage.
As initially reported by Bloomberg, the recent news that leading crypto exchange FTX is exploring the possibility of acquiring Robinhood Markets Inc. (NASDAQ: HOOD) has ignited discussion about the trading app that played a key role in the retail investor boom of 2020 and 2021.
One anonymous source has suggested that FTX founder and CEO, Sam Bankman-Fried has been involved in internal deliberations surrounding the purchase of Robinhood.
The suggestion that Robinhood could soon be taken over has driven investors to Robinhood’s stock, with some speculating that FTX’s interest may pave the way for other bidders to emerge in what could be one of 2022’s most anticipated transactions.
As Robinhood’s 2022 stock performance has shown, the company has struggled severely with a series of cryptocurrency market downturns, as well as more widespread stock market sell-offs. The news of a potential acquisition did contribute to a brief 30% rally in late June, before further negative price movements took hold.
One of the key drivers for a cooling of Robinhood’s recent price revival came from FTX CEO, Sam Bankman-Fried, who was quick to confirm that no active discussions to acquire Robinhood were taking place.
“We are excited about Robinhood’s business prospects and potential ways we could partner with them. That being said, there are no active M&A conversations with Robinhood,” Bankman-Fried confirmed in an email statement shortly after the news broke.
Although Bankman-Fried sought to distance himself from talks surrounding the acquisition of Robinhood, the cryptocurrency entrepreneur did reveal in May that he’d acquired a 7.6% stake in the US trading platform.
Could an Acquisition be the Perfect Solution for HOOD?
The news of a potential acquisition for Robinhood was met favourably by Wall Street. In the wake of HOOD’s stock market debut, the company obtained a valuation of $32 billion. Today, following a series of sustained declines, its market capitalization stands at $7.2 billion.
There are many key factors behind such a disappointing fall in value. One of the leading reasons comes down to Robinhood’s disproportionate reliance on Dogecoin, a meme-based cryptocurrency that was heavily promoted by Elon Musk in early 2021. Subsequently, the asset drove 62% of the platform’s cryptocurrency-based revenue in Q2 2021, with crypto accounting for 50% of Robinhood’s entire transaction-based revenue in the quarter.
Unfortunately for Robinhood, DOGE’s impressive price rallies in Q2 2021 couldn’t be sustained in the second half of the year, and by the time HOOD arrived on the Nasdaq in July 2021, the platform’s biggest driver of revenue had entered a decline that it’s yet to show any signs of recovery from.
With this in mind, an acquisition may present itself as a breath of fresh air for HOOD, as the stock continues to show little sign of recovery in what’s been a miserable first year of public life. With newly emerging fintechs building trading platforms with greater coverage areas and excellent investing options in comparison to Robinhood, it may be that the company could benefit from extra external help from an ambitious buyer.
This sentiment was echoed by analysts at Mizuho, who said in a recent note: “We believe that a potential deal would be good news for HOOD as it helps expand its reach and breadth. We also believe that HOOD can survive, and thrive on its own.”
“It is important to note that the two founders of HOOD collectively own over 50% of the company and would need agreement to proceed further in any M&A process,” the analysts added.
Despite Sam Bankman-Fried’s quotes appearing to cool speculation that a takeover could be imminent, the prolific entrepreneur has recently been active in injecting funds into cryptocurrency firms in the wake of the difficulties faced by the likes of crypto lender Celsius, and hedge fund Three Arrows.
In late June, BlockFi, a noted rival of embattled firm Celsius, confirmed that it had received a $250 million credit windfall from FTX to bolster its cash flow. Meanwhile, crypto trading platform, Voyager Digital announced an agreement to raise a $200 million cash and USDC revolver and a 15,000 BTC revolver from Bankman-Fried’s venture capital firm, Alameda Ventures.
Robinhood’s stock has continuously struggled to generate any momentum following an ambitious stock market listing off the back of a prosperous series of Q2 earnings in 2021. Now, as the stock continues to decline, the prospect of a takeover for the popular trading platform may be the perfect opportunity for a fresh start. Whether FTX follows up on its interest, or another buyer identifies HOOD as a strategic opportunity, it’s certainly worth investors keeping up to date on what could be one of 2022’s biggest buyouts.