Robinhood shares are down 6.7% in Friday trading.

Nance sees signs of “slowing retail engagement levels (particularly among lower-end consumers)”, as well as “continued weakness in account growth”. In his view, many of the customers Robinhood (HOOD) added last year were likely younger and less wealthy, and this cohort may become less active given macro trends.

“[A]As the benefits of the stimulus wane and the effects of higher gas prices and inflation ripple through the economy, we believe HOOD could continue to see higher levels of churn as these investors leverage their smaller dollar accounts for day-to-day expenses,” he wrote.

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Additionally, Nance has doubts about Robinhood’s ability to achieve profitability in 2023 based on current business trends. Although he expects higher interest rates to help boost the company’s revenue, he believes the company’s “pathway to profitability” [is] further and further.

“With the street currently forecasting adjusted EBITDA (earnings before interest, tax, depreciation and amortization) margins of around 5% in 2023, we believe that a reset in expectations could result in underperformance,” a- he writes.

Although Nance admits that Robinhood’s valuation looks “cheap on traditional measures” given that its market capitalization is around $11 billion, or about 4 times its 2023 revenue estimates, it isn’t. sure the company’s earnings trajectory will help improve sentiment a lot.

“[T]The lack of a clear path to profitability in an environment that is increasingly skeptical of valuing unprofitable fintech on a multiple-of-earnings basis limits the path for near-term revaluation, in our view Nance wrote.

Robinhood shares have lost around 29% in the past three months as the S&P 500 SPX,
+0.11%
fell 3.5%.