Robinhood Stock Is Up 83% in 2024, but Interest Rate Cuts Might Spell Bad News

Robinhood's Business Performance - Robinhood's stock price soared to a record high of $85 shortly after its IPO in 2021, driven by its popularity among young, first-time investors [1] - The stock price sank 91% to an all-time low of around $7 by mid-2022 due to the S&P 500 bear market, which deterred many clients from investing [2] - The company's stock price recovered with an 83% gain in 2024, largely due to the Federal Reserve's rapid interest rate hikes, which boosted interest revenue [3] Revenue Trends - Robinhood's monthly active users peaked at 21.3 million in mid-2021 but dropped to 11.8 million in Q2 2024 [4][5] - Transaction-based revenue in Q2 2024 was $327 million, significantly below the peak of $451 million in Q2 2021 [5] - Net interest revenue surged 319% from $68 million in Q2 2021 to a record $285 million in Q2 2024, driven by higher federal funds rates [6] Interest Revenue and Cash Holdings - Robinhood held $4.5 billion of its own cash and $4.5 billion in client funds in interest-bearing accounts in Q2 2024 [7] - The company's margin book reached an all-time high of $5 billion in Q2 2024, generating $73 million in interest revenue [8] Impact of Federal Reserve Rate Cuts - The Federal Reserve cut the federal funds rate by half a percentage point last week, with further cuts expected, potentially reducing Robinhood's net interest revenue [9][10] - The federal funds rate could decrease by almost half from its recent peak of 5.33%, leading to a significant decline in Robinhood's interest revenue [10] Transaction-Based Revenue Growth - Robinhood's transaction-based revenue growth in 2024 is primarily driven by options and cryptocurrency trading, which are riskier and less reliable for long-term growth [11] - The company cannot rely on these segments to offset the expected decline in interest revenue [11] Stock Price Outlook - The recent recovery in Robinhood's stock price may stall as interest rates decline further, making it a less attractive investment at this time [12]