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Why Robinhood stock is ‘underappreciated’ in the market, according to JMP Securities director

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Devin Ryan, JMP Securities Director of Financial Technology Research, joins Yahoo Finance Live to lay down the fundamental and technical bull case for Robinhood stock despite it having fallen 45% since the brokerage’s public debut.

Video transcript

ZACK GUZMAN: Well, it was a record year for IPOs in 2021. And it was good, and it was bad for some names out there, including some high profile names, Robinhood off from its post-IPO high, declining about 73% down to $18 a share roughly. So some are saying that could be a big buying opportunity, including our next guest here, Devin Ryan, JMP Securities director of financial technology research joins us on the show today.

And Devin, good to have you with us. I mean, when we look at Robinhood, it is interesting because that was really caught up in the retail frenzy earlier this year. So it is one of those names that's very much tied into what we saw. You have a price target of 58 though, and seem to think that there is a lot of upside for this name. So talk to me about what investors might be missing now.

DEVIN RYAN: Sure. Hi, Zack. Good to see you. So there's a couple of things. And we've been talking about this, I think even on your show recently. There's both technical dynamics, and there's fundamental dynamics.

On the technical side, and I think this is underappreciated in the market, is that when they went public, they had roughly 70 million shares that were tradable in the float. And over the course of a month from, really, into December 1, you had 600 million shares unlock and essentially become tradable, which means that that created, in our opinion, a lot of technical selling pressure, because if you recall, Robinhood's had this meteoric rise in valuation over the past few years.

And earlier this year in the last fundraise before going public, they were valued at just under $12 billion. And so the market cap today still $16 billion, which means that a lot of that money that came in from investors when Robinhood was private, they're still very much in the money on that investment.

So that creates a little bit of technical overhang, in our opinion. And I think investors that are savvy probably got ahead of that as well. So you might have seen some shorting in the stock. And then when all of the float increased, what that did was it made shorting the stock a lot easier. So it'll be really interesting to see where short interest ends up when we get the most recent print. And so that's the technical dynamic.

The fundamental dynamic, I would argue, is better than most people appreciate. And there's a lot of negativity around the stock right now. They had a soft third quarter, commentary about the reopening trade, and so retail investors are going back to work and people aren't investing.

When I look at the market, you had, in our estimation, about 10 million new investors come to the market in 2020. In 2021, we estimate it was more like 15 million, probably something a little bit shy of that. So 2021 was a much better year than even the prior record of 2020.

And this is not a business that ever moves on a straight line. It has always been volatile. You add new accounts around market events. You add new accounts around product launches. And so on the fundamentals, we think fundamentals are better than some people appreciate because you added 25 million new investors.

And those investors, even if they trade at a lower rate, will still be active. And then in 2022, we expect to see a lot of new product launches. We expect Robinhood to be active in M&A. I heard your prior guest talking about NFTs. I would not be surprised to see Robinhood do something there.

So there's a lot more to come here. And people are under-appreciating it, because Robinhood's not giving everybody their full product roadmap, which is smart because competitors tend to follow what they do.

ZACK GUZMAN: Yeah. And I mean, we've chatted with their head of crypto, Christine Brown, on the show multiple times this year. And she's reiterated the Q1 rollout for their wallets and been testing and says those tests are going well. I mean, you can't really be a crypto company out there, call yourself a crypto company and not have a crypto wallet. So it is going to be interesting to see how much that attracts, in terms of new users, crypto-savvy users when that comes out in Q1.

But the other piece of your note that stood out to me was just kind of around estimations that they've been putting out there and guidelines for Q4. Obviously, as our chart shows here, they've run into issues before when it comes to maybe under-delivering. How much does that maybe matter when we think about what could come?

Obviously, there have been a lot of companies that have followed the roadmap of promise high. And it's hard to meet those lofty goals. But in the case of Q4 and the numbers looking ahead for Robinhood, how easy is it going to be for them to meet those?

DEVIN RYAN: Yeah. So it's an important question, especially for the near term. I think longer-term, it doesn't really matter all that much. But they had such a terrific first half of the year. And a lot of that was outside of their control. And I say that.

They did the right things, but the market backdrop was incredibly favorable. Anyone that follows the space realizes that wasn't normal. And that's not going to be repeated every quarter. And so you ended up with a third quarter that was a little bit soft. There was no real big market shocks. People were starting to go on vacation again. And so you did have a little bit of disengagement.

Some of the data we're tracking around fourth quarter suggests that fourth quarter should be better than the third quarter. So that's a good sign that we are seeing some recovery. But what people have to appreciate is the dynamics that drove activity in the first half of the year, the people rallying around meme stocks, GameStop, Dogecoin, that's not a one-time event.

In our opinion, social media and connectivity of retail investors, that is something that's going to be with us in the future. And it's always impossible to say, well, what's that next theme that's going to drive a frenzy of activity. But social media and connectivity and people using Reddit and other sources for information, that's now part of the everyday life.

And a lot of investors, as I just mentioned, nearly 25 million new people to the market, have had a lot of time to educate themselves and engage. And that's just on the trading side. You hit on crypto. Crypto is not going to just be about buying and selling Bitcoin and Dogecoin. That's table stakes. And that's going to become an increasingly commoditized part of the market. It already is.

But where you can differentiate is how do you deliver other products and services in crypto? Robinhood has huge balance sheet capital to put to work. They've hired tremendously, with a lot of engineers in that space. And they're going to be creative. And that's why they've succeeded thus far is they've created a good user experience.

There's been trading apps around for decades and decades. Robinhood succeeded thus far because theirs was better and was a better experience. So that's the key thing. They need to do that. If they don't, that's what we're watching for, to see if they have issues. But right now, we're pretty optimistic and also think that they're not completely showing their hand around what's coming.

So that's where I would say. And the last point is just, there's a lot of negativity around the stock. It's kind of been an easy call to say that retail is done here. And oh, on top of that, you have all the selling pressures, as we talked about in the technicals. Sentiment flip-flops pretty quickly. And when you're buying on negative sentiment, that to me tends to be a more constructive time with a better risk/reward.

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