Robinhood

What a difference a year makes.

Consider this: In late September 2024, investors could pick up one share of Robinhood (HOOD -0.38%) for about the price of a baseball cap — around $23.

As of this writing, that same share now trades for about $123.

So, what gives? Why have Robinhood shares increased fivefold in only 12 months? And, more importantly, where is the stock headed?

Image source: Getty Images.

Robinhood’s recent moves

As of this writing, shares of Robinhood have advanced by 233% year to date. Over the past three years, they’ve increased by a jaw-dropping 1,150%.

The engine behind this stock surge was good old-fashioned execution. Simply put, Robinhood is beating out its competitors, and that is generating investor optimism.

The company operates using a model under which it charges no commissions on trades and only passes unavoidable regulatory fees on to its customers. Instead, the company leverages its platform assets to generate revenue in other ways, including:

• Payment for order flow: It directs its customers’ buy and sell orders to vendors that pay fees for those orders, and which themselves profit on the spread between asking and bid prices.
• Net interest: This is revenue generated via the spread between the interest generated from customers’ cash balances and what Robinhood pays those customers in interest on their accounts’ cash balances.
• Subscriptions: Gold members receive access to certain tools, perks, and benefits.

As the total value of the assets on Robinhood’s platform increases, its ability to generate revenue does as well. As of the end of the second quarter, Robinhood’s total platform assets stood at $279 billion, up from $62 billion at the end of 2022.

Consequently, Robinhood’s trailing 12-month revenue has increased from $1.4 billion three years ago to $3.6 billion today. Similarly, the company has swung from a significant net loss of $1.3 billion in 2022 to a net profit of $1.8 billion over the past four reported quarters.

Lastly, in addition to, and in part because of, the company’s excellent financials, Robinhood was recently added to the S&P 500, which further expands the stock’s appeal within the investment community.

What’s next for Robinhood?

While there’s no way to know for sure where the stock will be in one year, the stock looks appealing to me for several reasons.

First, its business model lends itself to natural growth. If the company can continue attracting new customers, it is likely to continue growing its top and bottom lines thanks to how it leverages customer assets.

Second, it continues to innovate, which opens up new revenue opportunities and helps drive new customer acquisition. Robinhood’s Vlad Tenev is one of my favorite CEOs because he thinks big and isn’t afraid to boldly experiment. The company has announced initiatives aimed at social media investing (Robinhood Social) and allowing retail investors access to private markets (through Robinhood Ventures Fund), among other innovative ideas.

Finally, Robinhood appeals to a younger investing demographic, one that will undoubtedly grow wealthier as the effects of the great wealth transfer begin to kick in. That will further increase its total platform assets, driving a virtuous cycle of greater revenue and profits.

In summary, Robinhood stock has surged over the past year thanks to its business model, solid execution, visionary leadership, and demographic tailwinds. In my opinion, those catalysts will continue for many years to come.

It is true, though, that there are risks to Robinhood’s stock price. Most notably, an economic downturn or a recession could dampen financial markets, resulting in decreased activity by retail investors — the traders who sit at the core of Robinhood’s business model.

However, over the long term — by which I mean five years or longer — I’m confident in Robinhood’s ability to deliver on its goals. Those seeking a long-term investment in the brokerage sector may want to consider Robinhood stock.

If you still think of Robinhood (HOOD -2.29%) as a trading platform for the risky retail investor, you’ve been missing what’s happening at the financial services company. Although retail investing is still its bread and butter, it has evolved into a large fintech company with a broad range of services.

Granted, risk-embracing traders might still be its core user base, but Robinhood has become impressively profitable and is leading the way in financial technology. Below, I’ll dig a little deeper and see whether Robinhood stock is a buy today.

Beyond meme status

Robinhood made a splash when it debuted free online trades, attracting millions of users who could easily start trading online. The concept took off but got plenty of negative attention for what people saw as encouraging risky behavior. That culminated in the GameStop episode, when retail investors banded together to create a short squeeze in the shares of the ailing video game and electronics seller.

Instead of putting the brakes on the company’s business, this episode made it a household name — and Robinhood has only grown since then. Today, it has an expanded and profitable business offering many financial services, all with its signature, disruptive style.

Image source: Getty Images.

Trading is still Robinhood’s core business, and many of its new services are different kinds of investing instruments, including cryptocurrency and options. But the company is leaning into more traditional products, like bank accounts and credit cards, too, and is launching in new regions. It’s catching on and becoming a solid player in finance.

Consider the phenomenal second-quarter results. Revenue increased 45% year over year to $989 million, and net income was up 105%. Funded accounts increased 10% over last year to 26.5 million, and Gold membership, which is the company’s premium program, increased 76% to 3.5 million members.

It’s moving beyond its products and tapping into the excitement and energy of its user base, and it just announced the launch of a new social media app for its users to be able to communicate about trading. Previously, users gathered in spaces like Reddit to collaborate, where idle and even misleading speculation sometimes was sometimes taken as investment advice. Robinhood is planning for its social media channel to follow an X-style template, but trades will be verified if users chat about them, which will take some of the sketchiness out of the picture.

This is important for another reason: Funded members, the company’s main user base, increased 10% year over year in the second quarter, which isn’t a huge increase. If Robinhood’s edge has been free trades, that edge is long gone. There are countless other brokerages offering free trading today, including almost every large bank, plus many new startups. Robinhood needs to monetize its user base in new ways but also needs another way to stand out.

High gains, high risk

Robinhood operates in some risky markets. Cryptocurrency, for example, may be all the rage today, and it’s been like that for a few years already. It may be here to stay, but it may not.

The company’s excellent performance also hinges on strong trading activity. The current bull market is driving trading volume, but that could end if the market turns bearish. You have to have a fairly healthy risk tolerance to invest in a company like Robinhood because its core products also are risky.

Finally, Robinhood has been a monster stock recently, up 500% during the past year. It trades at a sky-high valuation, which means it’s priced for perfection. That’s also risky because any error could send it plummeting.

HOOD PE Ratio (Forward 1y) data by YCharts.

In another 10 years, Robinhood could be much bigger and reward investors accordingly. If you believe in its innovative model, you might decide it’s worth the risk.

Most investors should probably wait and look for a few more rounds of increasing earnings and durability. I’d also wait for a better entry point before investing in Robinhood stock.