The online brokerage faces a lot of near-term challenges.
Robinhood's (HOOD 1.99%) stock has nearly doubled over the past 12 months, but it still trades nearly 50% below its IPO price of $38. The online brokerage lost its luster after rising interest rates ended the buying frenzy in meme stocks, riskier options, and cryptocurrencies, which had fueled most of its growth in 2020 and 2021.
But over the past year investors warmed up to Robinhood again as its customer growth stabilized in a new bull market. Will this volatile stock head even higher over the next 12 months?
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How Robinhood carved out its niche
Robinhood initially attracted a lot of attention with its commission-free trades and a streamlined app that gamified the investing experience. It also offered a free share of a random stock to its new investors. Those unique tactics helped it lock in younger retail investors and carve out its own niche in the crowded brokerage market.
Robinhood gained a lot of momentum as the pandemic drove people to spend more time on online trading platforms. Stimulus checks and social media buzz about meme stocks and cryptocurrencies also drew more first-time investors to its platform.
Robinhood's growth is stabilizing
Robinhood's growth can mainly be gauged by its number of funded customers, its monthly active users (MAUs), and its assets under custody (AUC). At the end of 2021, its number of funded customers had surged 81% to 22.7 million, its MAUs had jumped 48% to 17.3 million, and its AUC had increased 56% to $98 billion. Its total revenue surged 89% to $1.82 billion for the full year.
But in 2022 its revenue fell 25% to $1.36 billion as the pandemic waned and rising interest rates drove investors away from meme stocks and cryptocurrencies. By the fourth quarter of the year, its number of funded customers had risen just 1% year over year to 23 million, its MAUs had declined 34%, and its AUC had plunged 37%.
Most of Robinhood's customers weren't closing their accounts, but they were spending less time on its platform as their investments shriveled. The company was also struggling to gain new customers due to the market cooling off. But over the past year, its growth in funded customers and MAUs stabilized after the new bull market (especially in cryptocurrencies and high-growth stocks) boosted its total AUC.
Metric | Q4 2022 | Q1 2023 | Q2 2023 | Q3 3023 | Q4 2023 |
|---|---|---|---|---|---|
Funded customers | 23.0 million | 23.1 million | 23.2 million | 23.3 million | 23.4 million |
MAUs | 11.4 million | 11.8 million | 10.8 million | 10.3 million | 10.9 million |
AUC | $62 billion | $78 billion | $89 billion | $87 billion | $103 billion |
Data source: Robinhood Markets.
Robinhood also expanded its subscription-based Gold plan, which offers higher interest rates on uninvested cash, bonuses on taxable deposits and IRA contributions, bigger instant deposits, lower margin rates, access to high-level trading data, and other perks. Its number of Gold members rose 25% to 1.42 million in 2023.
Gold's expansion boosted Robinhood's average revenue per user (ARPU) even as its growth in funded customers and MAUs cooled off. In the fourth quarter of 2023, its ARPU rose 23% year over year and 1% sequentially to $81.
Robinhood's total revenue rose 37% to $1.87 billion in 2023. Analysts expect its revenue to increase 17% in 2024.
Robinhood's profitability is improving
Robinhood isn't growing as rapidly as it did during the pandemic, but it's been cutting costs to improve its profitability. On a generally accepted accounting principles (GAAP) basis, it narrowed its net loss from $1.03 billion in 2022 to $541 million in 2023. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also improved from negative $94 million in 2022 to positive $536 million in 2023.
In 2024, analysts expect Robinhood to finally achieve GAAP profitability, with its adjusted EBITDA increasing 33% to $711 million. During its latest conference call, CFO Jason Warnick said the company remained "focused on driving profitable growth for shareholders as we work to maximize EPS and free cash flow per share." It also bought back 5% of its shares in 2023.
But where will its stock be in a year?
Robinhood's prospects are brightening, but investors shouldn't overlook its weaknesses. With an enterprise value of $23.4 billion, its shares aren't cheap at 13 times this year's sales and 33 times its adjusted EBITDA. By comparison, its larger rival Schwab (NYSE: SCHW) trades at just 7 times this year's sales and 13 times its adjusted EBITDA.
Furthermore, Robinhood is heavily dependent on smaller retail investors who have an average account size of about $4,400, and it still generated 82% of its transaction revenue from riskier cryptocurrency and option trades instead of stocks in its latest quarter. It also doesn't have much of a moat against bigger brokerages like Schwab, Morgan Stanley's E*Trade, and Fidelity, which all offer commission-free trades. I believe all these issues will prevent Robinhood's stock from outperforming the S&P 500 and revisiting its IPO price within the next 12 months.
Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Charles Schwab. The Motley Fool recommends the following options: short March 2024 $65 puts on Charles Schwab. The Motley Fool has a disclosure policy.
