Robinhood Markets: Buy, Sell, or Hold?

Company Overview - Robinhood Markets is a new-age stock brokerage and financial services company that began trading at $38 per share in the summer of 2021, peaking at $70 before falling below $7 a year later [1] - The company has experienced significant stock price volatility, surging 240% over the past year but still barely reclaiming its IPO price [2] - Robinhood has disrupted the brokerage industry by offering commission-free trades, which most brokerages have since adopted [3] Business Model and Growth - Robinhood is evolving into a comprehensive financial platform, offering individual retirement accounts (IRAs), a credit card, and a subscription service with numerous perks [4] - The company's customer base grew by 1 million year-over-year in Q3, with a 76% jump in assets under custody (AUC) as people funded their retirement accounts [4] - Robinhood has achieved GAAP profitability, with $525 million in net income over the past four quarters on $2.4 billion in revenue [5] Revenue Streams and Financials - Margin loan interest and options fees account for 39.5% of Robinhood's total revenue through nine months of 2024 [5] - Retirement accounts, while necessary for growth, are not as lucrative as margin loans and options contracts [5] - Speculation-driven revenue, such as margin loans and options, tends to dry up during market downturns, as seen when monthly active users dropped from 21.3 million in Q2 2021 to 10.8 million in Q2 2023 [6] Market Sensitivity and Valuation - Robinhood's business is cyclical and fluctuates with the broader market, making earnings less dependable during downturns [7] - The company is attempting to generate more stable revenue from its credit card and subscription service to reduce dependence on trading activity [8] - Robinhood currently trades at a forward P/E ratio of 29, with analysts expecting earnings to grow by an average of 7% annually over the next three to five years [8] Investment Considerations - The stock's valuation is steep at nearly 30 times earnings, especially for single-digit growth, suggesting investors are betting on outperformance [10] - Given the stock's volatility and hefty valuation, it may be prudent to consider it a hold and wait for a pullback [11] - For long-term investors, a dollar-cost averaging strategy could be effective in managing the stock's volatility [11]