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Retail investors are ‘ditching growth stocks,’ risky assets: Analyst

S&P Global Market Intelligence Tom Mason joins Yahoo Finance Live to discuss how retail investors are navigating market volatility and the outlook for Robinhood stock as the SEC looks to clamp down on payment for order flow.

Video Transcript

- Well, Robinhood currently trading down about 2% there in the session after an early morning downgrade from Atlantic Equities. The trading platform was downgraded to underweight with a $5 price target. To talk more about the state of the company, we've got S&P Global Market Intelligence senior research analyst Tom Mason.

Tom, I'm looking at the stock right now. $7 a share. If we're talking about a $5 price target, which is what this particular analyst called for, 30% downside. It feels like Robinhood's kind of getting hit from all sides, the volatility on the equity side, but also the declines we're seeing in crypto.

TOM MASON: Yeah, exactly. I think that there was this notion that the crypto markets would be low correlation with the regular equity markets. And yeah, it's just been the exact opposite. Like you were saying throughout the program, retail investors are just ditching growth stocks, any kind of risky investments right now.

- Yeah, the question is, on the equity side, how many of the retail traders are staying put? Obviously, Robinhood has seen huge surges on the back of the growth in retail trade. In terms of Atlantic Equities, they say specifically falling equity trading volumes and regulatory change threatens the equity revenue. It sounds like you're not necessarily seeing those declines yet.

TOM MASON: Yeah. I can see why analysts would be concerned, myself included, but yeah, based on Schwab and the Interactive Brokers, we really haven't seen a huge decline in trading volumes. I think what we're seeing on the retail side is like the broader market, where people are reallocating. So they're just-- they're not necessarily leaving the market entirely. They're just going into less risky investments.

- So you're saying that hasn't necessarily affected trading volumes. I mean, the question then is, well, why are we seeing so much downside to Robinhood? I'm looking through your notes here, and you say specifically that it is really about diversifying the revenue base. What changes does Robinhood need to make, given the market conditions right now?

TOM MASON: Yeah, so there's been two themes, two natural pivots that I see for them. One would be to actually acquire a bank, which they've tried to go through the process of forming one, so that they would get more deposit income, you know, the suite deposits, so any kind of net interest revenue. And then also I think if they went into asset management. I think that their mission is to not do that because they want to just democratize the markets and say, hey, you can trade whatever you want, but I think the asset management would be a much more stable revenue base and, yeah, potentially lucrative for them.

- How much value do you think something like that could unlock?

TOM MASON: Yeah, so I mean, for Schwab, it's typically 20% or 25% of their revenue base. So yeah, I think that would, yeah, be nice. And I think also Robinhood needs to grow along with their customers. So I think Cash App is going to come in and take all the Gen Z investors away from them, based on what I've been seeing. So I think that asset management would make total sense, as millennials get older and start to think more about wealth planning.

- How do you look at the regulatory risk for Robinhood? We've obviously seen the SEC now weigh in on payment for order flow, which is a huge revenue maker for the company. We're not talking about a complete ban yet, but how big of a hit is Robinhood likely to take?

TOM MASON: Yeah, so my estimate back when Robinhood was still trading around $30 a share was their stock would be cut in half based on the reaction that we saw after brokers all eliminated commissions, so like Schwab, TD Ameritrade at the time. They all-- their revenue-- or sorry, their stock decreased about the same amount as the revenue that they lost from that. And since Robinhood makes up about half of its revenue from payment for order flow, it also has some crypto transaction rebates, some fees from options trading, but I think that would, yeah, it would cut the stock in half at least.

- Cut the stock in half. $7. Half of $7. We're talking about slowly approaching penny territory there. Tom, appreciate your time today. S&P Global Market Intelligence senior research analyst Tom Mason.