Commission-free online brokerage Robinhood (NASDAQ:HOOD) has served up massive gains to its shareholders in the last year, rising by more than 300 percent.
These returns have been the result of huge improvements in both Robinhood’s top and bottom lines, and the business is still growing well today.
Is Robinhood stock going to keep marching higher, or has HOOD started to approach the limits of its current valuation?
10 Quarters of Top Line Growth
One of the forces driving Robinhood prices higher has been a sharp and sustained increase in the business’s revenue over the past two years. Robinhood has delivered 10 consecutive quarters of revenue growth, and at no point in the last two years has its rate of year-over-year revenue growth dropped lower than 23%.
Another aspect that has helped Robinhood shares keep their momentum is a massive increase in net margins. Between Q3 and Q4 of last year, Robinhood’s net margin surged from 21.8% to 47.8%. This higher rate was sustained in Q1 of this year with a margin of 48.8%.
Robinhood’s revenue and earnings growth continued apace in Q1, with revenues rising 50% to $927 million and net income rising 114 percent to $336 million. Transaction-based revenues rose 77% compared to the year-ago period, driven in large part by a doubling of cryptocurrency transaction revenues. Average revenue per user also grew at a healthy rate of 39 percent to a total of $145.
Robinhood Gold, a subscription-based tier that gives members access to high interest rates on uninvested cash and other perks, has also grown enormously over the past year. At the end of Q1, Robinhood had 3.2 million Gold members, a 90 percent increase from a year earlier.
Does Robinhood Have a Moat?
While rapid gains in both revenue and earnings have driven Robinhood shares steadily higher, investors looking at the stock as a long-term holding will likely require the business to have a solid competitive advantage.
As of Q1, the business had 27.0 million investment accounts, up 11% from a year earlier. Platform assets, meanwhile, rose 70% to $221 billion. With both its user base and platform assets still growing steadily, it seems that Robinhood is a long way from losing its status as a go-to brokerage among younger traders and those looking for easy access to the stock market.
Robinhood is also working to expand its financial services, particularly into the world of banking. While other fintech companies, most notably SoFi, are well ahead of Robinhood in this area, an expanded suite of offerings could help the business capitalize on its existing base of users while also becoming a larger part of their day-to-day financial lives.
With that said, Robinhood is still far from being dominant in its industry. More established brokerages like Fidelity and Schwab still have an edge when it comes to their market positions and seem unlikely to lose that edge anytime soon.
As such, Robinhood seems to have a modest moat stemming from its large and engaged customer base, but not an ironclad competitive advantage.
Robinhood May Be Overvalued
Although Robinhood could be a promising business, its stock is trading at a very high valuation after the gains of the last 12 months.
Right now, HOOD is priced at 52.5x earnings, 26.1x sales, 10.3x book value and 80.5 times operating cash flow. The share price has also gone well beyond the analyst consensus target price of $74.93, which implies a downside of almost 19 percent from the most recent trading price.
This high valuation may also partially account for a significant drop in institutional buying activity in recent months. Since February, institutional investors have been selling more shares of Robinhood than they’ve been buying.
Robinhood’s Potential Risks
Despite its strong recent numbers, it’s important to acknowledge that there could be some macro risks to Robinhood’s growth.
Although the chances of a recession this year have been downgraded, JPMorgan still projects a 40x chance that one begins before the end of the year. This, in turn, could reduce investors’ willingness to continue adding assets to their brokerage accounts.
Similarly, higher tariffs and inflation that’s still above the Fed’s target range could leave less income available for saving and investment.
It’s worth noting, however, that there are also macro arguments on the other side. The Fed is expected to cut rates by 0.25x three times this year. Lower interest rates tend to make stocks more attractive, potentially resulting in ongoing growth in assets at Robinhood and other brokerages.
The easing of trade tensions has also helped stocks regain their highs after sharp losses in April, a fact that could keep investors coming to Robinhood to take advantage of the market’s more bullish attitude.
Will Robinhood Stock Keep Going Up?
Right now, Robinhood is posting extraordinary numbers, particularly as it relates to high net margins. It has also been able to raise its return on equity to 21.4 percent and its ROIC to 11.3 percent. These returns are quite attractive, especially considering that they’re being produced by a fairly young company that’s still growing as fast as Robinhood is.
The Board is even going so far as to allocate cash to share buybacks, a somewhat unusual move for a business that is young, growing rapidly and experiencing massive increases to its share prices.
In Q1, management repurchased 7.2 million shares at a price of $322 million. Management still has $833 million in outstanding share repurchase authorizations and expects to deploy this cash over the next two years.
The one major problem, however, is likely to be the valuation HOOD has reached after rising as much as it has. With shares of the company having outstripped analyst expectations by nearly 20% and seemingly having gone beyond what many institutional investors are willing to pay, it may be somewhat difficult for the stock to keep rising even if financials remains strong. In the event of a downturn or an unexpected obstacle to Robinhood’s growth, the current pricing could set HOOD up for a downward correction.
Right now, Robinhood looks like it could be more of a hold than a buy. Despite the business having many positive features and attractive growth opportunities in front of it, the stock may have gotten a bit too high to keep its momentum up from here.
With that said, investors may want to watch the stock for better entry points, as it does seem that Robinhood as a business is in a good position to keep delivering solid growth and creating value for its shareholders.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.