Robinhood's stock has fallen approximately 20% from its all-time highs, placing it into a bear market. The discount broker, which went public in mid-2021, has a relatively young client base and has aggressively expanded into new market niches such as crypto trading and sports betting.
Robinhood competes with companies like Charles Schwab and Interactive Brokers. It disrupted the industry by pioneering commission-free trading and incorporating game-like elements into its digital app. The stock has risen about 1,100% over the past three years despite the recent decline.
Investors are concerned about Robinhood's valuation, with a price-to-earnings ratio near 50. This compares to 24 for Charles Schwab and 34 for Interactive Brokers. The S&P 500 index has a P/E ratio of roughly 31, while the average financials stock, represented by the Vanguard Financials Index ETF, has a P/E of about 19.
The company's customers have not experienced a deep bear market, such as those during the Great Recession or the dot-com bubble. If history is a guide, investors may panic and sell during a downturn, which could boost trading activity. However, a prolonged bear market might lead some younger customers to view investing as too risky, potentially shrinking Robinhood's customer base.
Robinhood has forced the industry to lower trading costs, but investors appear to have priced in much of the good news. The real test of the business will come during the next deep bear market. Most investors should probably wait to see how the company performs in a declining market before considering it.
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