There may be an unavoidable possibility at the horizon for Robinhood.
Robinhood Markets (HOOD 0.31%) went public in 2021 at $38 in step with proportion and temporarily rocketed to an all-time prime of $85. Traders rewarded the corporate’s talent to draw younger, first-time traders who sought after to industry monetary property like shares and choices contracts to its platform.
Then again, the endure marketplace all the way through 2022 spooked a lot of Robinhood’s purchasers, and its inventory due to this fact plunged by means of greater than 90% from its document prime. A restoration is now underway, and Robinhood inventory has soared 315% from its 52-week low of $7.91.
However is it too past due for traders to shop for? There’s a key possibility that would possibly cap Robinhood’s upside attainable from right here, and I’m going to inform you what it’s.
Robinhood’s transaction earnings continues to be down from its 2021 ranges
Right through the height of the inventory marketplace frenzy in 2021, Robinhood had 21.3 million per 30 days lively customers on its platform. Traditionally low rates of interest, trillions of greenbacks in pandemic-related stimulus bills, and lockdown restrictions have been a successful aggregate for Robinhood’s younger investor base, who threw warning to the wind in meme shares like GameStop.
Robinhood’s number one earnings supply is processing transactions on behalf of its purchasers. The corporate earns a rate each and every time an investor buys or sells a inventory, futures contract, choices contract, or cryptocurrency. In the second one quarter of 2021, Robinhood’s transaction earnings used to be $451 million, a document prime that also stands lately.
Right through the hot 3rd quarter of 2024 (ended Sept. 30), Robinhood’s transaction earnings got here in at $319 million. Now not simplest is that manner beneath its Q2 2021 top, nevertheless it used to be in truth down from each the primary and 2nd quarters of 2024, led by means of declines within the inventory and cryptocurrency segments.
Robinhood’s core industry hasn’t in point of fact grown within the closing 3 years, no less than when measured by means of its quarterly earnings. So, what is the factor?
Right through Q3, Robinhood had simply 11 million per 30 days lively customers. That is down 48% from the 2021 top and marks the low level for 2024 up to now, which means the platform would possibly have misplaced a few of its enchantment. It is going to be very tough for Robinhood to develop its transaction earnings from right here if lively customers proceed to drop off.
However that may not be the largest possibility dealing with the corporate at this time.
Symbol supply: Getty Pictures.
Robinhood’s passion source of revenue faces an unavoidable possibility
Between March 2022 and August 2023, the U.S. Federal Reserve raised the federal budget fee (in a single day rates of interest) from a historical low of 0.13% all of the strategy to a two-decade prime of five.33%.
Robinhood these days has $4.8 billion in money on its steadiness sheet, along with $4.4 billion in money it is preserving on behalf of its purchasers. That cash is saved in financial institution accounts which pay passion to the corporate. Moreover, Robinhood earns passion source of revenue from the $5.5 billion in margin loans these days held by means of its purchasers, which they use to shop for shares and different monetary property.
Merely put, prime rates of interest had been an enormous tailwind for Robinhood. Actually, its quarterly web passion earnings hit an all-time prime of $285 million in the second one quarter of 2024 (ended June 30). That is greater than the corporate generated in the entire of 2021 when rates of interest have been at a historical low. In different phrases, this has been the important thing motive force of Robinhood’s general earnings enlargement during the last 3 years.
Internet passion earnings fell to $274 million all the way through the hot 3rd quarter, and that could be the start of a power decline from right here. That is since the Fed slashed rates of interest by means of 50 foundation issues at its September assembly, adopted by means of an additional 25 foundation issues this month. Due to this fact, traders will have to brace for steeper declines in Robinhood’s web passion earnings within the upcoming fourth quarter and into 2025.
Robinhood inventory is rather dear at this time 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 easiest degree in two years, and it is a 59% top rate to its long-term reasonable of seven.6 going again to when it got here public in 2021:
HOOD PS Ratio information by means of YCharts
For the reason that P/S ratio is calculated by means of dividing an organization’s marketplace capitalization by means of its earnings, traders generally pay a top rate when earnings is rising temporarily. In Robinhood’s case, its transaction earnings has slipped (on a sequential foundation) for 2 directly quarters, and its web passion earnings could be set for a sustained decline.
Due to this fact, it does not make a lot sense for Robinhood’s valuation to be hiking so aggressively, and traders who purchase the inventory now would possibly possibility having the rug pulled from underneath them if the corporate’s earnings disappoints within the upcoming quarters.
So, is it too past due to shop for the inventory? I feel the solution is sure. Its perfect positive aspects could be within the rearview reflect.
