Robinhood Inventory Has Soared 315% From Its 52-Week Low. Is It Too Late to Purchase?

Robinhood Markets (NASDAQ: HOOD) went public in 2021 at $38 per share and shortly rocketed to an all-time excessive of $85. Traders rewarded the corporate’s capability to draw younger, first-time traders who needed to commerce monetary belongings like shares and choices contracts to its platform.

Nonetheless, the bear market throughout 2022 spooked a lot of Robinhood’s shoppers, and its inventory subsequently plunged by greater than 90% from its report excessive. A restoration is now underway, and Robinhood inventory has soared 315% from its 52-week low of $7.91.

However is it too late for traders to purchase? There’s a key threat which may cap Robinhood’s upside potential from right here, and I will let you know what it’s.

Robinhood’s transaction income remains to be down from its 2021 ranges

Throughout the peak of the inventory market frenzy in 2021, Robinhood had 21.3 million month-to-month energetic customers on its platform. Traditionally low rates of interest, trillions of {dollars} in pandemic-related stimulus funds, and lockdown restrictions had been a profitable mixture for Robinhood’s younger investor base, who threw warning to the wind in meme shares like GameStop.

Robinhood’s main income supply is processing transactions on behalf of its shoppers. The corporate earns a payment each time an investor buys or sells a inventory, futures contract, options contract, or cryptocurrency. Within the second quarter of 2021, Robinhood’s transaction income was $451 million, a report excessive that also stands at this time.

Throughout the current third quarter of 2024 (ended Sept. 30), Robinhood’s transaction income got here in at $319 million. Not solely is that manner beneath its Q2 2021 peak, however it was really down from each the primary and second quarters of 2024, led by declines within the inventory and cryptocurrency segments.

Robinhood’s core enterprise hasn’t actually grown within the final three years, a minimum of when measured by its quarterly income. So, what is the challenge?

Throughout Q3, Robinhood had simply 11 million month-to-month energetic customers. That is down 48% from the 2021 peak and marks the low level for 2024 up to now, which suggests the platform may need misplaced a few of its attraction. It will likely be very troublesome for Robinhood to develop its transaction income from right here if energetic customers proceed to drop off.

However which may not be the most important threat going through the corporate proper now.

Picture supply: Getty Photographs.

Robinhood’s curiosity earnings faces an unavoidable threat

Between March 2022 and August 2023, the U.S. Federal Reserve raised the federal funds rate (in a single day rates of interest) from a historic low of 0.13% all the best way to a two-decade excessive of 5.33%.

Robinhood at the moment has $4.8 billion in money on its balance sheet, along with $4.4 billion in money it is holding on behalf of its shoppers. That cash is saved in financial institution accounts which pay curiosity to the corporate. Moreover, Robinhood earns curiosity earnings from the $5.5 billion in margin loans at the moment held by its shoppers, which they use to purchase shares and different monetary belongings.

Merely put, excessive rates of interest have been an enormous tailwind for Robinhood. In actual fact, its quarterly web curiosity income hit an all-time excessive of $285 million within the second quarter of 2024 (ended June 30). That is greater than the corporate generated in the entire of 2021 when rates of interest had been at a historic low. In different phrases, this has been the important thing driver of Robinhood’s complete income progress over the past three years.

Internet curiosity income fell to $274 million throughout the current third quarter, and that is perhaps the start of a persistent decline from right here. That is as a result of the Fed slashed rates of interest by 50 foundation factors at its September assembly, adopted by an extra 25 foundation factors this month. Subsequently, traders ought to brace for steeper declines in Robinhood’s web curiosity income within the upcoming fourth quarter and into 2025.

Robinhood inventory is kind of costly proper now relative to its historical past

The 315% rally in Robinhood inventory from its 52-week low has catapulted it to a price-to-sales (P/S) ratio of 12.1. That is the very best degree in two years, and it is a 59% premium to its long-term common of seven.6 going again to when it got here public in 2021:

HOOD PS Ratio information by YCharts

Because the P/S ratio is calculated by dividing an organization’s market capitalization by its income, traders sometimes pay a premium when income is rising shortly. In Robinhood’s case, its transaction income has slipped (on a sequential foundation) for 2 straight quarters, and its web curiosity income is perhaps set for a sustained decline.

Subsequently, it does not make a lot sense for Robinhood’s valuation to be climbing so aggressively, and traders who purchase the inventory now would possibly threat having the rug pulled from below them if the corporate’s income disappoints within the upcoming quarters.

So, is it too late to purchase the inventory? I feel the reply is sure. Its finest positive factors is perhaps within the rearview mirror.

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