Robinhood's (NASDAQ: HOOD) stock has rallied roughly 60% over the past 12 months, but it still trades at less than half of its initial public offering (IPO) price of $38 from July 2021. The online brokerage initially gained a lot of attention during the buying frenzy in growth and meme stocks, but it lost its luster as interest rates rose and its growth cooled off.
So should you consider buying Robinhood as a turnaround play? Or will the macro, regulatory, and competitive challenges weigh down its stock and keep it far below its IPO price?
Image source: Getty Images.
Robinhood is bouncing back from a tough slowdown
Robinhood initially carved out a niche among smaller retail investors with its commission-free trades, streamlined app, and gamification of the trading process. It also offered gift stocks as rewards for new sign-ups and referrals.
Those perks made Robinhood a popular trading platform in 2021, when a combination of social media buzz and stimulus checks drove many retail investors to aggressively trade hypergrowth stocks, meme stocks, options, and cryptocurrencies.
By the end of 2021, its number of funded customers surged 81% to 22.7 million, its monthly active users (MAUs) grew 48% to 17.3 million, and its assets under custody (AUC) climbed 56% to $98 billion. Its total revenue rose 89% to $1.82 billion.
But in 2022, its number of funded customers only grew 1% to 23 million as its MAUs declined 34% to 11.4 million and its AUC plunged 37% to $62 billion. Its total revenue fell 25% to $1.36 billion. That slowdown was mainly caused by rising interest rates, which curbed the market's appetite for Robinhood's more speculative investments.
In 2023, Robinhood's growth in funded customers and AUC offset its sluggish growth in MAUs. It also expanded its subscription-based Gold plan -- which offers higher interest rates on uninvested cash, bonuses on taxable deposits and IRA contributions, bigger instant deposits, lower margin rates, access to Level II trading data, and other perks -- to grow its average revenue per user (ARPU) as it gained fewer MAUs.
As a result, its revenue rose 37% to $1.87 billion in 2023 and exceeded its pandemic-era high in 2021. That trend continued this year as rebounding tech stocks (especially in the AI market) and the stabilization of crypto prices brought back the bulls. Robinhood's revenue rose 40% year over year in the first half of 2024, and analysts anticipate 38% growth for the full year.
Metric | Q2 2023 | Q3 2023 | Q4 2023 | Q1 2024 | Q2 2024 |
|---|---|---|---|---|---|
Funded customers | 23.2 million | 23.3 million | 23.4 million | 23.9 million | 24.2 million |
MAUs | 10.8 million | 10.3 million | 10.9 million | 13.7 million | 11.8 million |
AUC | $89 billion | $87 billion | $103 billion | $130 billion | $140 billion |
Data source: Robinhood.
But based on its enterprise value of $34 billion, Robinhood still looks reasonably valued at 13 times this year's sales. Its larger competitor Charles Schwab, which is growing at a much slower rate, trades at 8 times this year's sales.
However, investors should pay attention to the competitive and regulatory threats. Most of Robinhood's larger competitors -- including Schwab, Morgan Stanley's E*Trade, and Fidelity -- also offer commission-free stock trading. The U.S. Securities and Exchange Commission (SEC) also issued a Wells Notice (a warning of enforcement action) this May against Robinhood's crypto business, which accounted for a nearly quarter of its transaction-based revenues in the second quarter of 2024. Those headwinds might prevent jittery investors from paying a higher premium for Robinhood's stock.
Its margins and profits are rising
From 2022 to 2023, Robinhood narrowed its net loss on a generally accepted accounting principles (GAAP) basis from $1.03 billion to $541 million. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose from negative $94 million in 2022 to positive $536 million in 2023.
Those bottom-line improvements were driven by layoffs and other aggressive cost-cutting measures. In 2024, analysts expect Robinhood to finally turn profitable on a GAAP basis as it more than doubles its adjusted EBITDA to $1.08 billion.
Based on those expectations, Robinhood trades at 25 times this year's earnings and 32 times its adjusted EBITDA. By comparison, Schwab trades at 22 times this year's earnings and 15 times its adjusted EBITDA. The bulls will likely argue that Robinhood deserves its higher valuations because it's growing a lot faster.
Is it the right time to buy Robinhood?
Robinhood's growth metrics are stabilizing, its margins are expanding, and its valuations are attractive. Its near-term price might be driven by macro issues like interest rates, competitive concerns, or the SEC's potential crackdown on its crypto platform, but it could climb a lot higher if it overcomes those challenges. So for now, I think Robinhood is still worth buying at this steep discount to its IPO price -- as long as you're willing to ride out its volatile price swings.
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Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Charles Schwab. The Motley Fool recommends the following options: short September 2024 $77.50 calls on Charles Schwab. The Motley Fool has a disclosure policy.
