Robinhood’s business has expanded, and the stock is up 137% over the past year.
Robinhood Markets (HOOD -4.30%) has taken investors on quite a roller coaster ride since it went public in late July 2021. The past year has been kind to investors, with the popular online brokerage’s stock surging 137% higher. That stock price growth is likely because the company has done a good job of diversifying its offerings and attracting more customers and money to its platform. It also recently posted its best quarterly net profit since going public.
That kind of positive news has some investors considering the stock. Given its recent surge and the company’s improving bottom line, you might be as well. Before any final decision is made, there are at least three things to take into account as you develop your investment thesis on Robinhood.
1. Robinhood is expanding its offerings to attract more customers
Robinhood set out to make investing more accessible and affordable to retail investors and has been an innovator in the industry. The company made waves when it introduced zero-commission trading. On top of that, it also made it easy for customers to invest in any company, no matter the stock price, by permitting trades in fractional shares. It also ushered in 24-hour trading opportunities across hundreds of stocks.
Other brokerages have made changes to offer similar trading experiences and stay competitive with what Robinhood offers, forcing Robinhood to continue adding features to attract customers.
One way Robinhood looks to attract more money to its platform is by offering an appealing 5% annual percentage yield (APY) for customers’ uninvested cash. To earn this high yield, customers must subscribe to Robinhood Gold for $5 per month; otherwise, the APY is only 1.5%.
Image source: Getty Images.
Robinhood prefers Gold members for the recurring revenue and also because these users tend to be much more active on its platform. According to Chief Financial Officer Jason Warnick, Gold subscribers have eight times more assets under management, generate significantly more average revenue per user, and have five times more retirement account adoption.
The company also offers traditional individual retirement accounts (IRAs) and Roth IRAs and matches contributions, encouraging customers to maintain their retirement accounts with the brokerage long-term.
2. The fintech had its best quarterly profit in Q1
Robinhood’s efforts are paying off, which you can see in its first-quarter earnings results. The company posted a generally accepted accounting principles (GAAP) net income of $157 million, its best quarterly profit since going public. Its stellar results were driven by solid revenue growth across all sources, including transaction-based revenue, net interest income, and other revenue.
Its transaction-based revenue, which earns fees based on how actively customers are trading, grew 59% year over year thanks to robust trading across assets. Cryptocurrency revenue was particularly robust, increasing 232% from last year. Other revenue, including its Robinhood Gold subscription revenue, increased 35% year over year to $35 million.
Net interest revenue was also quite strong, growing 22% year over year to $254 million, thanks to higher short-term interest rates and higher net deposits, which boosted total assets under custody growth. This shows that its asset-gathering strategy is working.
Image source: Robinhood Markets.
Higher interest rates have attracted customers to its platform, which could pose a problem down the road. In the past two years, Robinhood’s net interest revenue went from 18% of the company’s revenue to 41%. If interest rates stabilize or fall, the company could see the key driver of revenue and customer asset growth turn into a headwind.
3. The company faces regulatory scrutiny
In early May, the U.S. Securities and Exchange Commission (SEC) sent Robinhood a Wells Notice, notifying the company that the regulator had discovered infractions and allowing the company to address the investigation before any rulings are made.
The notice concerns the company’s cryptocurrency listings, custody of cryptocurrencies on its platform, and other issues. Over the past few years, the SEC has taken a more critical approach to regulating digital currencies.
The commission argues that most cryptocurrency tokens are securities subject to registration rules and has cracked down on companies in the space. Last year, it charged Coinbase for illegally operating an unregistered securities exchange. Coinbase appealed the lawsuit, which was rejected by the U.S. District Court earlier this year. That case is still ongoing.
In response to the Wells Notice, Dan Gallagher, Robinhood’s Chief Legal, Compliance and Corporate Affairs Officer said:
After years of good faith attempts to work with the SEC for regulatory clarity including our well-known attempt to ‘come in and register,’ we are disappointed that the agency has decided to issue a Wells Notice related to our U.S. crypto business. We firmly believe that the assets listed on our platform are not securities and we look forward to engaging with the SEC to make clear just how weak any case against Robinhood Crypto would be on both the facts and the law.
Robinhood stock looks expensive
Robinhood’s growth over the past year is impressive as it continues to add customers and assets under custody. Its net income is trending in the right direction and has increased in three of the past four quarters, and the stock has soared higher as a result.
However, regulatory scrutiny will persist, which could potentially impact its cryptocurrency-based revenue. Additionally, a significant portion of its revenue growth has come from net interest revenue, which may not be sustainable over the long run. Given this backdrop, Robinhood stock looks slightly pricey at a price-to-sales ratio of 9 and 40x this year’s projected earnings.