Robinhood stock is on fire. Will the good times continue?
Not long ago, Robinhood Markets (HOOD 0.48%) was one of the biggest stories in the stock market.
The mobile-first trading app revolutionized the brokerage industry, making commission-free trading the norm, and bringing a new generation of investors to the market, with Robinhood being the most popular platform among Millennials and Generation Z. Robinhood was also central to the meme of the stock’s rise The boom in cryptocurrencies in 2021 is further evidence of the impact on the stock market.
However, as a stock, Robinhood has mostly been a disappointment. The company went public in a highly anticipated initial public offering in July 2021. The stock initially roared out of the gate, but then fizzled as the bear market began just a few months later. As cryptocurrency prices declined, Robinhood’s trading volume shrunk, and its once fast-growing business ground to a halt.
However, while the company doesn’t get as much attention in the financial press these days, the stock has been on a tear this year, nearly doubling this year so far. Can’t his momentum continue? Let’s take a look.
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How Robinhood Bounced Back
Robinhood has benefited from high interest rates, allowing it to earn interest on the funds it holds between transactions and on customer deposits. It has also benefited from a surge in AI and cryptocurrency stocks, which has brought renewed interest in investing after the 2022 recession.
Revenue jumped 40% in the second quarter to $682 million, including a 69% increase in transaction-based revenue. That was also balanced across the board, with options revenue up 43% to $182 million, cryptocurrency revenue jumping 161% to $81 million, and stocks up 60% to $40 million.
Net interest income also rose 22% to $285 million, and its investment in Robinhood Gold, its subscription product, is also paying off, reaching 2 million subscribers, up 61% year over year.
On the bottom line, the company impressed too, with net income jumping from $25 million to a quarterly record of $188 million, or $0.21 per share. This comes from revenue growth and cost control measures. Technology and development, its largest line item, was essentially flat in the quarter at $209 million, and general and administrative expenses fell 16% to $134 million helped by multiple rounds of layoffs.
Total operating expenses rose just 6% to $493 million, demonstrating that the company has control over profitability, generating a GAAP net profit margin of approximately 28%.
Robinhood isn’t just taking advantage of the bull market. In addition to Robinhood Gold’s growth, it has also expanded to include retirement accounts like IRAs, offering investors a more comprehensive set of services as it aims to serve more than just traders.
Is Robinhood a buy?
Robinhood got another boost last week after it announced its first Investor Day conference, scheduled for December 4. In general, companies tend to hold Investor Day events when they have good news or forecasts to share, and the company said it plans to share more about its vision for the next 10 years. The conference could be a catalyst for another rally for the stock.
One risk facing the company is that interest rates will fall, which will impact the company’s interest income because it earns less on the money it holds, but the federal funds rate is not expected to fall to zero, so this may be less of a headwind. Than some investors think.
Robinhood stock is also starting to look reasonably valued, trading at a forward price-to-earnings ratio of 35 based on this year’s EPS estimates. With its costs under control, the company is also in a better position than it was a year ago.
Its business is still very volatile, and another bear market could hurt shares, but it seems likely that the disruptive brokerage will continue to gain market share in its industry. For risk-tolerant investors, Robinhood’s upside potential looks attractive, but the stock’s volatility is likely to remain.
