Robinhood (NASDAQ:HOOD) announced its plan to lay off 9% of its full-time employees and scale back duplicate roles it added during its period of rapid growth at the start of 2020, sending its shares tumbling 4% in pre-open Wednesday.
Robinhood grew substantially on the heels of the coronavirus outbreak two years ago as more individual investors joined the platform to invest in crypto assets and “meme stocks”. During the period, the company’s number of employees increased to 3,800 from 700, according to Robinhood CEO Vlad Tenev.
“This rapid head count growth has led to some duplicate roles and job functions, and more layers and complexity than are optimal,” said Tenev. “While the decision to undertake this action wasn’t easy, it is a deliberate step to ensure we are able to continue delivering on our strategic goals and furthering our mission to democratize finance.”
Robinhood is slated to report its quarterly earnings on Thursday. Tenev wrote in a blog post that the financial services company has $6 billion in cash on its balance sheet.
Last month, Robinhood said it would extend trading hours - to 7 a.m. ET to 8 p.m. ET - in a bid to rebound from a growth slowdown.
Morgan Stanley analyst Michael Cyprys noted 3 implications of yesterday’s decisions:
- Continuation of a shift in mgmt's tone and focus towards sustainable customer monetization and profitability;
- Recognition of a weak revenue backdrop that's unlikely to improve in 2022; and
- Recognition that lack of profitability is a key investor concern.
“We expect HOOD inflects to profitability on an adjusted EBITDA basis in 2023 (in-line with consensus) and today's announcement gives us more confidence in those estimates, with potential for that timeline to be accelerated in the context of a rising rate environment that should support net interest revenues,” the analyst said in a client note.
Goldman Sachs analyst Will Nance estimates that HOOD could potentially save $50-65 million, which should help margins by 2.5-3%. However, the analyst says that investors are likely to see this announcement ahead of tomorrow’s print as “an ominous sign for top-line dynamics.”
“We believe the announcement aligns with the company's objectives of rationalizing the company's expense base and digesting prior years' growth. We also believe this reflects the realities of the current backdrop of weaker retail engagement and lower ARPUs. On the one hand, we see this as a modest positive, as the brokerage business is fixed-cost-oriented and this shows mgmt is looking to optimize profitability and deliver on the company's stated targets of reaching profitability in 2023. On the other hand, we believe the announcement will be met with investor concern regarding trends in the business and mgmt's outlook for a rebound,” Nance said in a client note.
By Senad Karaahmetovic