Shares in trading app Robinhood [HOOD] have fallen 11% since it announced on 8 November that it had been hit by a “data security incident” affecting 7 million customers.
It said that, in the 3 November event, “an unauthorised third party obtained access to a limited amount of personal information for a portion of our customers”. It added that the attack had been contained and that no Social Security numbers, bank account numbers or debit card numbers were exposed and that customers had not suffered any financial loss.
Socially engineered
The unauthorised party had socially engineered a customer support employee by phone and obtained access to certain customer support systems, the company, headed by CEO Vladimir Tenev (pictured above) said in a statement.
“At this time, we understand that the unauthorized party obtained a list of email addresses for approximately five million people, and full names for a different group of approximately two million people. We also believe that for a more limited number of people — approximately 310 in total — additional personal information, including name, date of birth, and zip code, was exposed, with a subset of approximately 10 customers having more extensive account details revealed. We are in the process of making appropriate disclosures to affected people,” it stated.
This is not the first time Robinhood has suffered a cyberhack, with nearly 2,000 brokerage accounts being compromised last year in an attack which allowed hackers to take over customers’ trades and funds.
Trust hit
According to Bloomberg Intelligence analyst Elliott Stein, any potential legal fallout should be “minimal” for a company of its size, and estimated a fine of around $10m.
But it is the reputational hit which will be of prime concern for Robinhood and its users.
It’s already been a tough year for Robinhood whose shares, following its IPO in July, initially rocketed as high as $85 in early August, boosted by younger people with time on their hands in the coronavirus pandemic looking for trading highs and excitement. It was also driven higher by cryptocurrency trading, given the volatility in this sector.
Since society has re-opened some of that fervour has died away, but the main threat to the group and perhaps the biggest reason for its share price plunge of around 60% since August has been comments from the US Securities & Exchange Commission.
60%
Robinhood's share price plunge since August
It is deliberating whether to ban Payment for Order Flow at the non-commission broker, which accounts for around 80% of Robinhood’s revenue.
This is a practice where brokers send trade orders to market makers that execute the trades in return for some of the profit.
Robinhood has already been fined $70m by the Financial Industry Regulatory Authority for causing investors “widespread and significant harm” and, as reported by the Financial Times, allowed customers to trade derivatives when it was “not appropriate” for them, and “gave customers false or misleading information about how much cash was in their accounts and their ability to trade on margin”.
Poor Q3 for Robinhood
The company also suffered from a weak third quarter when revenues of $365m, although up 35% year-over-year, missed analyst forecasts of $431.5m. According to CNBC, third-quarter transaction-based revenue came in at $267m, with just $51m related to cryptocurrency trading.
In the second-quarter, Robinhood’s revenue from crypto trading stood at $233m, boosted by demand and interest in dogecoin.
“Don’t expect HOOD stock to rise soon unless it becomes clear that crypto trading will rebound,” wrote Mike Hake in InvestorPlace.
JPMorgan has the stock as underweight and a price target of $26. "We believe Robinhood has been overearning,” it said.
However, according to Market Screener, analysts have an outperform rating on the stock and a $43.33 target price.
“Don’t expect HOOD stock to rise soon unless it becomes clear that crypto trading will rebound” - InvestorPlace's Mike Hake
Crypto wallet hope
KeyBanc Capital Markets has an overweight rating, liking the group’s “cash management scaling, yield enhancements, the crypto wallet launch and automatic account transfers-in”.
Indeed, it now has 1.6 million people on the crypto wallet waiting list. It is set to launch next year, allowing users to move digital currencies in and out of their brokerage accounts.
If Robinhood can maintain security and trust, it could be just the boost its share price needs.
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