The stock market is off to a rocky start in 2022 with the S&P 500 index down 1.9% already. But the high-growth technology sector represented by the Nasdaq 100 index is down more than double that amount, losing 4.5% year to date.
Some technology stocks delivered astronomical gains in 2021, so a pullback is not unexpected. However, that presents an opportunity for investors to buy in at a discount, as might be the case for digital-document innovator DocuSign (NASDAQ:DOCU). On the other hand, a steep loss can be a signal to head for the exits and cut your losses — Robinhood Markets (NASDAQ:HOOD) fits that bill.
Why DocuSign is a buy
DocuSign is best known as the leader in digital signature technology, but to avoid the pitfalls of a one-dimensional business model, it has expanded into some key verticals. The company is leveraging new-age tech like artificial intelligence to build the next generation of digital tools for businesses.
The pandemic triggered a boom for DocuSign as companies transitioned to work-from-home arrangements and required innovative ways to operate with some normalcy. The company doubled its customer base from 585,000 in March 2020 to over 1.1 million as of this writing. But now that employees are slowly returning to the office, the company has to prove its staying power.
There’s an argument that the hybrid work model is here to stay with some employees maintaining a work-from-home schedule at least in some capacity, and that would be of major benefit to DocuSign. But the company isn’t relying on that. For instance, its Insight platform can analyze legal contracts using artificial intelligence to identify risks, and that’s useful to any organization that deals with a high volume of legal paperwork. Lawyers are expensive, so this tool could be a huge cost saver — whether at home or at the office.
DocuSign stock rallied from $75 at the beginning of 2020 to as high as $315 in 2021, but it has since taken a 57% hit amid a broad tech sell-off. That might be an opportunity, because DocuSign is now delivering consistent profits. In fiscal 2021, it generated $0.90 in non-GAAP earnings per share, but in the current year, analysts predict the bottom line will more than double to $1.98 per share.
That’s why DocuSign is one stock to buy during this tech-stock rout, especially for investors with a long-term focus.
Why Robinhood is a sell
After reaching an all-time high of $85 per share in Aug. 2021, Robinhood stock has collapsed, falling 81%. The company rose to prominence as the stock-trading platform favored by Generation Z, a demographic most brokers have struggled to attract with their complex user interfaces and commission structures.
Robinhood delivered a smartphone app that almost resembles a game, and it successfully marketed its zero-commission business model to break down the barriers preventing young investors from entering the stock market. But this strategy has come under intense scrutiny from the Securities and Exchange Commission, which has issued numerous financial penalties to Robinhood over the last few years.
Most notable was a $65 million fine in Dec. 2020, which the company incurred for misleading investors about the true costs of its zero-commission model. Robinhood generates revenue from a practice called payment for order flow, and as it turns out, the customer can actually pay more in fees, not less, even though they’re paying zero at face value. And more recently, the regulator vowed to review “gamified” features on smartphone-brokerage apps, as they’re thought to encourage excessive risk taking.
But to add fuel to the fire, Robinhood made a significant pivot into cryptocurrency trading last year — an industry also under pressure from lawmakers with new rules set to be introduced as soon as 2023. In the third quarter of 2020, Robinhood customers’ cryptocurrency trading made up just 2.5% of the company’s transaction-based revenue, but in the same quarter of 2021, it ballooned to 19.1%. It was as high as 51.7% in the second quarter.
For a company already under the microscope for its practices, this change in focus might prove detrimental in the long run.
Financially, 2021 was a year of staggering losses for Robinhood. In the nine months ended Sept. 30, it lost $8.85 per share, compared to a loss of just $0.02 per share in the prior-year period. It comes amid a whopping 313% increase in operating costs as the company ramps up its technology development and marketing.
Put simply, Robinhood isn’t doing much right at the moment, and it’s going to take a monumental effort to stave off the regulatory risks to its business. That’s why investors are likely better off selling the stock.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.