Discerning the Action on Robinhood Markets: Should You Purchase, Sell, or Maintain?
Diving into Robinhood Markets (HOOD's 1.51% stock) is like an exhilarating amusement park ride. The company made its debut at $38 per share in the autumn of 2021 and has experienced highs and lows, with the share price peaking at $70 before dropping below $7 just a year later.
Despite its tumultuous journey, Robinhood's growth can't be overlooked, thanks to its modern products and user-friendly trading platform. This has led to an impressive 240% surge in the stock price over the past year, although it has yet to surpass its initial public offering (IPO) price.
But what's next? Should you buy, sell, or hold this rollercoaster stock?
A turbulent but promising business
Love it or hate it, Robinhood is a trailblazer in the brokerage industry. It gained traction by offering commission-free trades, with many competitors soon following suit. While the company has faced criticism, such as critiques over payment for order flow and the GameStop short squeeze, it has consistently strived to evolve.
Robinhood has introduced products like individual retirement accounts (IRAs), a credit card, and a subscription service. These strategies have proven successful, as shown by Q3's 1 million user base growth and a 76% jump in assets under custody (AUC). This has helped Robinhood achieve GAAP profitability, with $525 million in net income over the last four quarters on $2.4 billion in revenue.
However, beneath the surface, the financials may not be as compelling. Retirement accounts contribute to a growing platform but aren't as lucrative as margin loans and options contracts. In fact, margin loan interest and options fees account for 39.5% of Robinhood's total revenue over nine months in 2024.
These speculative activities may dwindle during market downturns, as witnessed in Q2 2023 when the company's monthly active user count dropped from 21.3 million to 10.8 million due to the market decline and increasing interest rates.
Uncertainty gnaws at the stock
Investors might be rightfully cautious about the stock's valuation as a function of its unreliable earnings. This isn't a reflection on Robinhood's integrity, but rather a cyclical business that is inexorably swayed by market trends until additional revenue sources diversify its reliance on trading activity.
In response to this, Robinhood is establishing new revenue streams, such as its credit card and subscription service. This development is crucial for investors to consider when deciding whether or not to invest in ROBO.
Currently, the stock trades at a forward price-to-earnings (P/E) ratio of 29. Analysts expect a 7% annual earnings growth rate over the next three to five years. While this growth is promising, paying nearly 30 times earnings for such modest growth rates might be a steep investment.
This challenge creates a potential opportunity for investors seeking a pullback prior to diving in.
Investors should approach considering Robinhood (HOOD) as a 'buy,' 'sell,' or 'hold' stock based on its unique blend of innovation, growth, and volatility. A 'hold' strategy is recommended, allowing an investor to monitor the stock's price action and the financial health of the business before deciding on a move.
If a long-term perspective is your preference, employ a 'dollar-cost averaging' strategy. This method involves buying shares gradually to smooth out the investment's cost basis, which can be particularly useful in volatile stocks like Robinhood. Eventually, as other revenue streams develop and the business stabilizes, the volatility might subside, leading to better price performance.
Given the company's focus on expanding its revenue streams beyond trading activities, investing in Robinhood's stock could potentially yield returns as these new income sources become more significant. However, the stock's high valuation based on its uncertain earnings necessitates careful consideration and a long-term investment strategy, such as dollar-cost averaging.
Engaging in finance, with an emphasis on investing in Robinhood, requires a keen understanding of the company's financial health and market trends, making informed decisions crucial for achieving optimal money management results.
