With YTD gains of 25%, Robinhood stock (HOOD) has broken out this week to outpace the performance of the S&P 500 Index ($SPX) this year. However, HOOD's post-IPO performance has been dismal, to say the least, and it trades at just about a quarter of the 2021 IPO price of $38.
Robinhood stock hit its all-time high of $85 in August 2021, shortly after its public trading debut. The initial spike wasn’t difficult to explain; as investors will likely recall, that was the same time period when the meme stock mania was near its peak – and HOOD itself became a meme stock amid the buying spree, exemplified by Reddit traders.
Q2 2021 was Robinhood’s best-ever quarter in terms of revenues and active users, as it benefited from frenzied trading in options and cryptocurrencies. Its transaction-based revenues – which include revenues from trading stocks, options, and cryptocurrencies – surged 141% YoY to $451 million in Q2 2021.
Robinhood’s Revenues Have Fallen from the 2021 Peak
During that quarter, Robinhood got more revenues from cryptocurrencies than stocks and options combined - somewhat ironically, since it is generally known to be a stock trading app.
Fast forward to Q3 2023, and Robinhood reported transaction-based revenues of only $185 million, which is 11% lower YoY. Its monthly active users stood at 10.3 million, less than half of what it was in Q2 2021.
Interestingly, Robinhood’s net interest revenues rose 29% to $251 million in Q3, coming in significantly higher than transaction-based revenues – which, in an ideal world, should be the proverbial “bread and butter” for the company. Robinhood’s interest income has spiked amid the rise in interest rates, which helped the company post its first-ever net profit in Q2 2023.
What Could Drive Robinhood Stock in 2024?
As we head into 2024, there are multiple factors that Robinhood investors need to watch out for. These are:
Fed Rate Cuts: The Fed’s rate hikes have been a double-edged sword for Robinhood. While higher interest rates have kept away many traders, and especially the retail investors who account for a large chunk of Robinhood’s customer base, it has also meant that the company is making higher returns on cash and other investments.
However, nearly all market participants now believe that the Fed will cut rates in 2024, even if opinions differ on the timing and magnitude of those cuts. While those rate cuts would mean that Robinhood’s interest income will come down, it remains to be seen whether that translates into higher trading volumes, as well.
Notably, during the Q3 earnings call, Robinhood said that its net interest revenues in Q4 would be around $20 million lower than Q3, and blamed lower free credit balances on high net purchases by clients, as well as lower securities lending activity.
Cryptocurrency Trading: In Q3 2023, Robinhood earned just $23 million from cryptocurrency trading, which is about 10% of what it was at the peak in Q2 2021. It has has been a good year for digital assets in 2023, and Bitcoin (BTCUSD) has topped $40,000 for the first time in 19 months. Incidentally, while shares of Coinbase (COIN) and bitcoin mining companies like Marathon Digital Holdings (MARA) and Riot Platforms (RIOT) have soared, we haven’t seen any similar price movement in Robinhood - possibly because cryptocurrencies accounted for less than 5% of its total revenues. However, if cryptocurrency trading volumes on Robinhood increase, it could mean higher revenues for the company.
Foray into Other Financial Services and Expansion of Total Addressable Market: Robinhood is also banking on growth drivers like its Gold subscription and retirement solutions – and is also coming up with a credit card next year. It plans to become a financial services powerhouse in the coming years to gain a higher share of customer wallets and increase its total addressable market.
International Expansion: Robinhood is looking to enter the cryptocurrency trading market in the E.U., where it says regulations are much more accommodative than in the U.S. Robinhood has already made its third attempt to enter the U.K. stock broking market, and will offer consumers the option to trade in around 6,000 U.S.-listed stocks.
With Robinhood facing slower growth at home, international expansion makes sense - but it remains to be seen what response it gets outside the U.S. Also, international expansion would mean more expenses and investments toward building infrastructure.
Robinhood had nearly $5.5 billion in cash and investments at the end of September, and while that is higher than what a company of its size would need, it also provides it with balance sheet strength amid the currently tough macro environment.
HOOD Stock 2024 Forecast
Analysts are not too bullish on Robinhood’s 2024 forecast, though, and it has received a consensus rating of “Hold." Of the 13 analysts covering the stock, only 3 rate it as a “Strong Buy” and 6 as a “Hold.” One analyst rates HOOD as a “Sell,” while the remaining 3 have given it a “Strong Sell” rating.
Robinhood’s mean target price of $11.77 is a 16% premium to current prices.
Cathie Wood Is Buying HOOD Stock
The retail trading boom of 2020-2021 now seems like a different epoch altogether, which might not return – at least anytime soon. And at a next 12 months (NTM) price-to-sales multiple of 4.25x, HOOD stock does not look like a tempting buy, either. However, Cathie Wood of ARK Invest has been trimming her stake in Coinbase while adding more Robinhood shares.
I would, however, steer clear of HOOD at current levels, given the rising competition in the discount brokerage market. Moreover, Robinhood still needs to demonstrate that it’s on a path to sustainable profitability, and establish the brand as a serious financial services player - and not merely a “fun trading app.”
Overall. I believe that there are a lot of moving parts for Robinhood in 2024, and given the current macro environment, I would not buy the stock at these prices.
On the date of publication, Mohit Oberoi did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
