![Meme' stock Robinhood jumps 10% in end to turbulent week | Reuters Meme' stock Robinhood jumps 10% in end to turbulent week | Reuters](https://mysoeasy.com/wp-content/uploads/2024/04/Robinhood-Case-Study-Q3-2023.jpeg)
Contents
Introduction
Whether you’re a retail investor or a financial industry professional, it’s likely that you’re familiar with Robinhood (NASDAQ: HOOD), the leading low-cost retail brokerage platform that went public a few years ago.
The company was infamous in the financial community before the pandemic due to its zero-commission business model, which forced bigger incumbents like TD Ameritrade and ETRADE to follow its lead in cutting commission fees to zero.
However, despite the company’s industry-shaping impact, Robinhood eventually became most famous for its role in the GameStop meme stock craze in early 2021, during which the brokerage firm briefly prevented customers from purchasing GME stock (and other stocks) as they rose.
While the action was prudent and essentially mandated by the National Securities Clearing Corporation (NSCC) due to Robinhood’s small balance sheet, the move generated a tremendous amount of controversy and prompted several conspiracy theories from HOOD’s main customer base of retail traders.
In additional to the reputational damage (that the firm is still shrugging off), the company’s stock has also struggled since IPO, down more than 85% from its all-time high of $85 per share.
Behind the decline are issues around revenue predictability, market cyclicality, and high interest rates, which have hurt fintech multiples across the market.
However, I believe that the company has officially turned a corner, and now stands to generate improving financial results as a consequence of its continued business execution and product shipping velocity.
Well positioned in its industry, and with numerous catalysts set to launch in the coming months, I expect that if interest in the stock gets re-ignited, then investors could see some serious upside in future quarters.
Today, I am taking a look at where things stand with the company, and how upcoming catalysts could send the stock soaring with a new core narrative focused on the company’s consolidated product offering.
Sound good? Let’s jump in.
Robinhood Markets
Robinhood, founded in 2013 and headquartered in Menlo Park, California, is an American financial services company known for its commission-free stock and cryptocurrency trading platform. The company’s mission is to democratize finance, making investing accessible to all.
At its core, Robinhood offers a user-friendly mobile app enabling individuals to trade stocks, options, ETFs, and cryptocurrencies without traditional commission fees. The platform’s intuitive design has attracted a diverse user base, particularly younger and less experienced investors.
Revenue is generated through various channels, including the premium subscription service Robinhood Gold, margin trading, and selling order flow to market makers.
However, as aforementioned, despite praise for empowering a new generation of investors and driving the industry trend of eliminating trading commissions, Robinhood has faced scrutiny for revenue practices, such as the controversial sale of order flow and concerns about gamification.
Apart from the core trading platform, Robinhood has expanded its services to include fractional share investing, cash management, and a high-yield savings account. The company has introduced features like its own debit card which has allowed it to increase user growth.
Despite challenges such as regulatory scrutiny, legal issues, and public relations challenges, Robinhood continues to shape the retail investing landscape and the broader financial services industry as shown through their recent financial results.
Financial Results
In its most recent quarter (Q3 2023), HOOD saw assets under custody (‘AUC’) pull back 2% sequentially due to market fluctuations, though I expect AUC to move sequentially higher in the next quarter given the recent market rally.
![AUC AUC](https://mysoeasy.com/wp-content/uploads/2024/04/Robinhood-Case-Study-Q3-2023.png)
Strong deposits, in fact, are what investors should be focused on. Deposit growth in Q3 of $4.0 billion was up 18% y/y, roughly consistent with Q2 (due in part, as previously mentioned, to sweeter-than-usual sign up offers).
![Robinhood deposits Robinhood deposits](https://mysoeasy.com/wp-content/uploads/2024/04/1713033975_270_Robinhood-Case-Study-Q3-2023.png)
HOOD saw net revenues grow 29% YoY but fall 4% QoQ. While net interest revenues have continued to rise, transaction-based revenues fell for the second straight quarter.
![AUC AUC](https://mysoeasy.com/wp-content/uploads/2024/04/1713033975_910_Robinhood-Case-Study-Q3-2023.png)
We can see a breakdown of transaction-based revenues below — the company is most well known for commission-free equity trading, thus it makes sense that it derives the majority of its transaction-based revenues from options trading.
![transaction-based revenues transaction-based revenues](https://mysoeasy.com/wp-content/uploads/2024/04/1713033976_11_Robinhood-Case-Study-Q3-2023.png)
I expect the next quarter to see solid if not stronger transaction-based revenue growth given the recovery in crypto trading volumes as well as the stable equity and options volumes reported in November.
The most important story of the past many quarters has been the surge in net interest revenues. The rising interest rate environment has led to growth in interest revenues from not only margin and customer cash balances, but more importantly from the company’s corporate cash balance. Further, the increase in net interest revenues means less of a revenue concentration from transactions. Transaction revenue accounted for 75% of Robinhood’s revenue in 2020, whereas now it comprises less than 40% of total revenues, indicating greater revenue diversification.
![net interest revenues net interest revenues](https://mysoeasy.com/wp-content/uploads/2024/04/1713033977_238_Robinhood-Case-Study-Q3-2023.png)
While rates aren’t expected to stay high forever, Vlad Tenev, Robinhood’s CEO, has expressed that to some degree the business is self-hedging:
One of the nice things about our business is that it’s naturally hedged for changes in interest rates. Trading revenues and interest income tend to move in opposite directions. So we think we’re pretty well positioned to perform financially regardless of the rate environment.
We’ve seen this play out over the last few years. In the lower rate environment, trading revenues were strong. But with rates moving higher, trading revenue abated some, but interest income has picked up.
This remains to be seen across longer cycles, but the dynamic here is similar to Coinbase.
It is also important to note that average revenue per user (ARPU) increased by 27% to $80 YoY.
The company had previously seen adjusted EBITDA turn negative in late 2021 and early 2022 due to a plunge in transaction-based revenues. The surge in net interest revenues has helped the company report 5 straight quarters of positive adjusted EBITDA with nearly 191% growth YoY.
![adjusted EBITDA adjusted EBITDA](https://mysoeasy.com/wp-content/uploads/2024/04/1713033977_527_Robinhood-Case-Study-Q3-2023.png)
The company would have posted its second straight quarter of GAAP net income if we exclude $104 million in regulatory accrual.
![GAAP net income GAAP net income](https://mysoeasy.com/wp-content/uploads/2024/04/1713033978_549_Robinhood-Case-Study-Q3-2023.png)
HOOD repurchased 55 million shares in the quarter from Sam Bankman-Fried’s Emergent Fidelity Technologies, spending just over $600 million on the transaction. That led to shares outstanding declining by 5.3% YoY.
![share count share count](https://mysoeasy.com/wp-content/uploads/2024/04/1713033978_517_Robinhood-Case-Study-Q3-2023.png)
HOOD ended the quarter with $5.4 billion in corporate cash, down from $6.3 billion sequentially (primarily due to the share repurchase mentioned above). The lower cash balance may pressure net interest revenues in the near term — on the conference call, management guided for roughly a $20 million sequential decline in net interest revenues.
![balance sheet balance sheet](https://mysoeasy.com/wp-content/uploads/2024/04/1713033979_983_Robinhood-Case-Study-Q3-2023.png)
Growth Drivers
So, what’s next for Robinhood’s growth trajectory? The platform has clearly evolved beyond its origins as a mere stock trading app, now encompassing a comprehensive suite of financial services including spending, saving, and retirement options. This expansion is further bolstered by its synergistic subscription program, “Robinhood Gold,” which integrates seamlessly with its offerings.
Credit Card
Robinhood will be launching a Credit Card offering in the coming months.
The offering is said to be built into Robinhood Gold, which strengthens the moat around membership.
This should build gold momentum, which has been very strong as of late, up 22% YoY:
![HOOD HOOD](https://mysoeasy.com/wp-content/uploads/2024/04/1713033979_212_Robinhood-Case-Study-Q3-2023.png)
Per CEO Vlad Tenev’s remarks on the Q3 earnings call:
Robinhood Gold continues to be our number-one focus in deepening relationships with our customers. Over the past year, as the environment evolved and customers were looking for new ways to save and invest, we put a lot more value in Gold by adding a 4.9% APY on uninvested cash and a 3% match on IRA contributions. As a result, subscriptions are now over 1.3 million and growth is accelerating as we added 100,000 in Q3 alone and 240,000 over the past year. Today, 6% of Robinhood customers are Gold subscribers, and new customers are joining Gold at more than double that rate. Gold customers had tens of thousands of dollars in average assets under custody, up more than 60% year-over-year and they’ve opened IRAs with us at seven times the rate of non-Gold customers. As we look ahead, we want the majority of our customers to be Gold subscribers and we’re taking a number of steps to make that a reality.”
Here’s some more info about the credit card offering, direct from the CEO:
We actually just reviewed and approved the final designs for what’s going to become the Robinhood credit card last week, so we’ve been making good progress. The team is super motivated to launch it. And we do anticipate there will be a period of learning. Of course, X1 has had some data from their customer base. But we anticipate once we release this new product, the scale of Robinhood’s customer base is much bigger.
…
After acquiring X1 in July, our team has been hard at work, creating an awesome credit card and we’ve got something special planned for Gold customers.
International Expansion
Second, the news about planned international expansion is a much-welcomed reason for optimism.
Robinhood is gearing up for a significant stride into the international market, beginning with its planned entry into the UK market in 2024. However, this expansion isn’t limited to the UK alone; it’s part of a larger global strategy that includes rolling out crypto trading services in the EU post the UK launch. This would mark the first international expansion by the company, which is exciting.
This is important for a few key reasons. First, international retail brokerage has not seen the pressure that U.S. brokerage has. Competition should be light, especially for equity trading, as a large portion of foreign trading is done via CFD, not physical settlement.
Second, getting Robinhood’s feet wet is key to launching in more and more jurisdictions in the future. This is doubly true as the CEO has maintained that launching is not a technical issue, but simply a regulatory one:
So I did mention that equities trading, in particular, 24-hour market will be available at launch. In terms of the other value props, again, would rather not run ahead of the announcement, like we’ll find out very soon. The benefits of doing our international expansion organically is we can leverage the same platform. That’s why Robinhood 24 Hour Market is available at launch. It’s all on the same platform. So there’s really no technical limitation to making our services available anywhere that we operate. It’s all just a matter of licensure and making sure that we have the appropriate licenses for all the different products we offer. And I think you’re really going to start to see the organic strategy paying dividends as we continue to expand across multiple jurisdictions, and we add things here in the US and we add — we connect to different market centers overseas. You’ll see that the value accrue both to our US customers and the customers in new jurisdictions.
Venturing into these new territories presents Robinhood with a substantial opportunity to explore fresh revenue streams, especially in light of the crypto boom. Expanding beyond its US base could potentially unlock significant earnings, offering a new avenue for growth and diversification.
Futures
Finally, Robinhood is looking to launch futures in 2024. The CEO recently mentioned that he thinks this has the potential to be a 9-figure revenue business, which would be a serious boon to HOOD’s current financial situation:
Let me now talk about futures. We’re getting closer to unveiling our offering there. And we have been hard at work, building what we believe is the best-designed futures product, particularly on mobile. Competitors generate hundreds of millions of annual revenue from futures trading. So as we continue to execute, we believe we have a real opportunity to expand the market, take market share, and build a nine-figure revenue business over time.
In addition to the impact of a new revenue stream, this should also help HOOD capture share.
Right now, I believe Robinhood is still viewed by professional traders as a somewhat unsophisticated platform that can’t compete with more fully featured software, like NinjaTrader, TradingView, or Sterling. However, if HOOD is able to build out a solid, vertically integrated, commission-free futures offering, then it will seriously help HOOD’s goal of building up their more advanced trading offerings, which should drive loads more revenue:
Talking about our active trader offerings, as I mentioned earlier, our goal is to be the number one platform for active traders and we have been gaining share. And for the last three quarters sequentially, we’ve seen our market share of options and equity transactions continue to increase.
A well thought out futures offering should boost financial results significantly.
All in all, these product launches could lead to new interest in the company from both customers and investors, which could lead to stronger financial results, as well as an improved multiple.
Risks
While the firm is poised to continue to grow, there are some risks when it comes to investing in Robinhood.
Regulatory Risks
The number one risk to be aware of is around Robinhood’s transaction business. If payment for order flow (PFOF) is ruled illegal or regulated out of existence by the SEC (or any other market regulatory agencies), then Robinhood could lose a big chunk of business. There was some chatter about this a while back, but it’s died down for the time being.
Macro Risks
If interest rates were to decline without an associated increase in transaction-based revenues (deep recession), then time may become an enemy. The company’s large net cash balance sheet would buy some time in that case, but that would be eventually unsustainable given that the strong balance sheet makes up such an important part of the bullish thesis.
Also, the company’s entrance into credit cards may present credit risk (though Robinhood would be presumably trying to attract high net worth individuals).
Furthermore, the company’s association with cryptocurrencies may lead to “black swan” risk similar to what was seen at regional banks earlier this year. While increased crypto activity currently bolsters growth, the inherent volatility of the crypto market casts uncertainty on its sustainability.
Speculation Risks
Other risks to be aware of include the fact that the thesis here is somewhat speculative in nature. The anticipated increase in transactional revenue faces uncertainty as recent data shows equity notional trading volumes and options contracts traded aligning closely with the previous month, raising questions about a definitive revenue surge. Moreover, the consistent decline in MAUs by 16% year-over-year to 10.3 million signifies a prolonged decrease since the pandemic, indicating potential challenges in retaining and engaging users on the platform.
Furthermore, Robinhood may fail to launch these new products, or they may fail to generate significant top line growth that would ultimately facilitate an improved top line multiple. The stock valuation is not so attractive unless top-line growth accelerates meaningfully or the company can demonstrate mature profit margins sooner than expected.
Similarly, international expansion, notably the entry into the UK market, carries inherent risks, and its success is not guaranteed.
However, if we look at Robinhood’s execution track record, I have every belief that the company will be able to meet its product goals in 2024, given how well it has executed historically:
![](https://mysoeasy.com/wp-content/uploads/2024/04/1713033980_638_Robinhood-Case-Study-Q3-2023.png)
At the end of the day, these factors need to be monitored closely as they could potentially impact the realization of the optimistic buy thesis for Robinhood.
Reputation
I would be remiss if I did not take the time to address Robinhood’s “reputation.”
HOOD appears to be struggling in consistently growing AUC in large part due to its reputation for being just for aggressive traders. However, I do not see any inherent reason why that reputation must stick indefinitely. HOOD is widely known for having an attractive user interface, something that is suspiciously uncommon among brokerage firms. As a digital-first company, HOOD may benefit from the typical cost savings of lower fixed cost overhead, but more importantly the company appears heavily motivated to innovate in an industry that has historically seen minimal innovation. Sure, other brokerage firms may be able to replicate much of their innovations (the prevalence of commission-free trading is one prime example) but that misses the point — customers may wish to bank with a firm that is leading the change, while also offering generous perks like higher APY and IRA matches.
Importantly, like I mentioned before, I expect the X1 credit card to be a turning point for the company — I expect HOOD to offer something like 3% cash back for Gold subscribers with future requirements based on assets at the firm. Bank of America has something similar at Merrill with their Preferred Rewards program, and I expect HOOD to experience greater success given their arguably stronger focus on brokerage innovation.
I view HOOD as being similar to TikTok in that it is resonating with newer investors, with payoffs that should accelerate over time as these newer investors earn higher pay checks and invest with greater capital.
Valuation
Trading at only 4.8x revenue, the stock is trading at the low end of its historical multiple, and below other high-growth stocks that are also turning the corner on profitability, like Nubank (NYSE: NU).
I expect the international expansion, the credit card, and the future product launches will generate significant new business for HOOD. Therefore, it seems as though real, sustained positive GAAP net income is on the table given that the company is already mostly breakeven.
Combined with the transaction business and subsequent diversification story that has been playing out, the setup in HOOD right now reminds me of Coinbase (NASDAQ: COIN), which has had quite the run.
With the outlined catalysts and ongoing business enhancements, HOOD could potentially reach around $3 billion in sales by 2025, surpassing current, surprisingly muted revenue estimates. Considering a modest P/S ratio of around 5 (where the stock currently trades amid efforts toward profitability), HOOD’s market cap could rise to $15 billion, a notable 65-70% higher than its current valuation.
However, if Robinhood succeeds in their new ventures, I believe that HOOD could see its multiple double to ~10x, out of the valuation trough it currently finds itself in, and closer to other high growth, brokerage/like peers like COIN.
If the stock ends up re-rating higher, when combined with some top line growth as a result of continued product execution, then it’s possible that shares could more than double to ~$25 by 2025.
Conclusion
Ultimately, while there are some risks in play, especially around PFOF as a business practice, Robinhood has done a great job building its app into a one stop shop for spending, investing, saving, and retiring.
With every new product release, the Robinhood Gold subscription offering gets stronger, and as the company looks to deepen, expand, and monetize each user relationship, I think the future looks bright. Gold’s value should serve to further increase revenue diversity, which is what should drive long term operating leverage —as 90% of HOOD’s cost base remains fixed.
Other than that, the story has been significantly de-risked since the Gamestop fiasco. Like aforementioned, Robinhood has more than $5 billion in corporate cash (70% of current market cap) on the balance sheet, which should buttress the company from most other risks.
Given the currently depressed valuation, I believe now is the time to buy stock before the market fully realizes the impact of the company’s future product launches and top line revenue potential.
I rate Robinhood a speculative buy on strengthening fundamentals and a fair price.
I am long Robinhood.
*Refer to my “Case Study Rating Structure” post to get additional insight on the rating scale of my equity case studies.