Robinhood Markets (NASDAQ: HOOD) has staged a powerful comeback, with its inventory hovering roughly 230% to $40 per share over the previous yr. Based simply 11 years in the past, this on-line brokerage reshaped the monetary panorama by introducing commission-free buying and selling for shares, ETFs, and choices, forcing conventional gamers to adapt.
Nevertheless, its journey within the public markets has been something however easy. After debuting in 2021 at $38 per share, the inventory tumbled to an all-time low of $6.81 inside a yr, reflecting doubts about its endurance. With the latest surge in its share value, the query now could be whether or not Robinhood inventory is a purchase, promote, or maintain.
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Robinhood is again in progress mode
After its pandemic growth, Robinhood’s 2022 income of $1.36 billion fell by 25% in comparison with 2021. Contemplating Robinhood’s progress inventory narrative, traders fled for the exits, fearing the worst.
Nevertheless, the brokerage has proved resilient, producing $1.94 billion in revenue via the primary three quarters of 2024, representing a 39% year-over-year improve. Digging into the turnaround particulars, the corporate generates most of its income via transaction quantity amongst its 11 million month-to-month lively customers, whether or not it’s choices, cryptocurrencies, or equities.
By way of the primary three quarters of 2024, Robinhood’s transaction-based income, pushed primarily by options trading, reached $975 million, equating to a year-over-year progress of 35%.
Subsequent, the brokerage generated $813 million in internet curiosity income, which is the curiosity generated on clients’ money sweep and margin balances much less the rate of interest given to customers. Notably, the corporate reported internet deposits of $34 billion via the primary three quarters of 2024, a rise of 172% yr over yr.
Lastly, Robinhood Gold, the corporate’s subscription providing, prices $5 per 30 days or $50 yearly and presents customers advantages like increased yields on uninvested brokerage money. This phase drove its “different revenues” phase by 29% yr over yr, equating to $149 million.
Robinhood is worthwhile and is shopping for again its shares
Robinhood’s latest income progress has propelled it into constant profitability, attaining 4 consecutive quarters of internet revenue. For the primary three quarters of 2024, the corporate reported $495 million in net income, a big turnaround from the $571 million internet loss recorded via the identical interval in 2023.
Along with its newfound profitability, Robinhood has $3.7 billion in internet money, which probably gave administration the arrogance to allocate capital to a brand new share repurchasing technique. In July 2024, Robinhood initiated a $1 billion share buyback program, spending $97 million to repurchase 5 million shares in Q3 2024.
Throughout the latestearnings name CFO Jason Warnick defined the rationale behind this capital allocation: “We love deploying capital like this. It lowers our share rely and positions us to extend EPS and free money circulate per share over time.”
Nevertheless, the precise affect of those repurchases stays unsure. A key problem lies in Robinhood’s excessive stock-based compensation, totaling $871 million in 2023. Extra just lately, in Q3 2024, whereas the corporate repurchased $97 million in shares, it additionally issued $79 million price of stock-based compensation, leading to simply $18 million in internet share repurchases.
Since its IPO, Robinhood’s share rely has risen by 5.8%, with solely a marginal 0.1% decline since introducing the buyback program in July. Transferring ahead, shareholders ought to monitor whether or not administration can scale back the share rely meaningfully or if buybacks merely offset the dilution brought on by stock-based compensation.
HOOD Shares Outstanding information by YCharts
Robinhood is a cyclical enterprise and depends on incentives
Along with challenges with stock-based compensation, Robinhood’s income is extra cyclical than that of conventional brokerages. A good portion of Robinhood’s income relies on buying and selling exercise, particularly in choices and cryptocurrency. This fluctuation in buying and selling exercise confirmed up in 2023 when Robinhood’s transaction-based income dropped by 4% in comparison with 2022.
Robinhood has additionally closely trusted incentives to draw and retain customers, resembling a $200 bonus for signing up for Robinhood Gold, in addition to account switch and retirement match incentives. This strategy considerably elevated its incentive spending, totaling $202 million via the primary three quarters of 2024 — a staggering 1,920% improve from $20 million yr over yr.
Whereas this technique has paid off to some extent — month-to-month lively customers rose 7% yr over yr to 11 million, and Robinhood Gold subscribers surged 65% to 2.2 million — it comes at a value. To maintain progress or preserve its present consumer base, Robinhood might have to proceed providing expensive incentives, which might erode its profitability.
Is Robinhood a purchase, promote, or maintain in 2025?
Robinhood has reworked the buying and selling panorama, empowering retail traders and forcing conventional brokerages to adapt. Whereas the corporate’s price-to-earnings ratio of 69.2 is considerably increased than competitor Charles Schwab at 28.5, Robinhood’s robust progress potential and recognition amongst youthful traders, with a median consumer age of simply 34, make it an intriguing alternative. For long-term traders who concentrate on innovation and market disruption, Robinhood is price including to your portfolio in 2025.
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Charles Schwab is an promoting associate of Motley Idiot Cash. Collin Brantmeyer has no place in any of the shares talked about. The Motley Idiot recommends Charles Schwab and recommends the next choices: brief March 2025 $80 calls on Charles Schwab. The Motley Idiot has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the creator and don’t essentially mirror these of Nasdaq, Inc.
