I can't tell you how many times my friends and family members have attempted to skid away from the topic of investing when it's brought up. To many of them, apparently, it seems like investing is something that should be reserved for hedge fund managers or professional portfolio analysts.
But investing does not need to be scary. Robinhood Markets (HOOD 4.44%) saw this disconnect and created a platform aimed to bridge the gap in the investing landscape. Its mission statement is "democratize finance for all."
And while the brokerage industry is filled with large consumer-focused brands such as Charles Schwab and E*Trade, Robinhood made its way into the mainstream primarily by appealing to a younger demographic. But is this a good thing?
Moving on from the past
There really isn't any sugar-coating it -- Robinhood has not always had the best reputation. A few years ago, the stock market mutated into an adrenaline-driven, social media-influenced portal in which any stock could soar to new highs (or crash to lows) at any point based on virtually no fundamental or logical explanation. Exemplifying all that hoopla was GameStop, which effectively brought the phrase "to the moon" into the stock investing lexicon.
Robinhood found itself in the center of the mess as crowds of younger people, most of whom had little to no prior investing experience, began downloading the app and buying a variety of meme stocks for less-than-sound reasons.
Eventually, during a period of short squeezes, Robinhood blocked its users from buying shares or options of the troubled video game retailer and other heavily shorted stocks. Though one of its founders later asserted that it hit pause on those transactions so that the trading platform could stay in compliance with federal requirements, it spooked the users of the platform, and the entire situation was a public relations disaster for Robinhood.
According to the company's Q1 2023 investor presentation, its monthly active user count (MAU) declined significantly from the highs it reached in the stock market euphoria of 2020 and 2021. For example, MAUs dropped from 21.3 million in Q2 2021 to 11.8 million in Q1 2023.
Yet the company seems to have finally turned a corner and is forging a pretty solid path forward. And I'm not the only person who believes that. Famed tech investor and Ark Invest CEO Cathie Wood has been buying Robinhood shares for quite some time. And she recently ratcheted up her funds' exposure to the stock.
Toward the end of February, Ark Invest held approximately 26.3 million shares of Robinhood spread across four of its exchange-traded funds (ETFs). Now, after her late-June/early-July buying spree, Ark Invest holds about 29.5 million Robinhood shares.
Wood's conviction around Robinhood lies in her thesis that the company has become an appealing "digital wallet" through which investors can buy and sell equities, crypto, and more complex financial products like options from their mobile devices. Furthermore, Robinhood also offers users the ability to store cash and earn relatively high interest rates on their savings.
Wood believes that Robinhood's intuitive, easy-to-use interface is attracting a new demographic to the investing world, and will help the company acquire more customers compared to traditional brokerage houses.
Image Source: Getty Images.
Profitability is closer than it looks
Given Robinhood's history, it should not surprise investors to learn that it has yet to return to the top-line results it was delivering a couple of years ago. The meme stock pandemonium back then drove an influx of revenue to the platform. And despite that anomalous period of top-line growth, even then, Robinhood was burning cash.
In 2021, Robinhood generated $1.8 billion in revenue but lost a staggering $3.7 billion. Then in 2022, when the stock market lost altitude, activity on the platform followed suit: The company reported revenue of $1.4 billion and posted a loss of roughly $1 billion.
In Q1 2023, Robinhood's revenue increased 47% year over year to $441 million. While that annual growth rate is impressive, it's also important to point out that Robinhood's Q1 2023 revenue was 16% higher than Q4 2022.And its core revenue drivers -- transaction-based fees and net interest income on deposits -- increased by 11% and 25%, respectively, from Q4 2022 levels.
So far, 2023 has been a solid year for investors. The S&P 500 has returned more than 15% year to date and the tech-heavy Nasdaq Composite index has returned more than 31%. Perhaps given the encouraging market conditions, investors are either returning to Robinhood's platform or new customers are joining it. In either case, the company is beginning to see some noticeable upticks across the board.
In addition to revenue growth, Robinhood has gotten more disciplined on the cost side. The company laid off 23% of its workforce in late 2022 and cut another 7% this year. For the first quarter, its net loss was $511 million, or $0.57 per share. However, that did include a "one-time $485 million share-based compensation ("SBC") expense related to our co-founders cancelling their 2021 market-based restricted stock unit awards in February 2023." After backing out that one-time charge and normalizing its net losses, the company burned just $26 million, bringing it close to breakeven.
The valuation is hard to ignore
Given Robinhood's lack of profits, investors can't use the price-to-earnings ratio as a valuation metric for it. One can, however, compare its price-to-sales ratio against some of its cohorts.
As of the time of this article, Robinhood trades at 6.4 times trailing 12-months sales. To put this into perspective, Charles Schwab -- a larger, more mature brokerage firm -- trades at 5 times sales. Other digital-first banking platforms such as Block or Coinbase trade at ratios of 2.1 and 6.4, respectively.
So by that metric, Robinhood lands squarely in the middle of the pack among its rivals. Given the consistent and increased buying activity from Wood, the growth of its primary revenue drivers, and the indications that it's on the path to profitability, Robinhood stock looks tempting at its current level.
While the company may be benefiting from what some view as a new bull market, Wood's thesis that Robinhood is becoming ingrained in the mainstream as a go-to "digital wallet" should really be at the crux of your investing thesis. Long-term investors who want to open a position would be best off dollar-cost averaging their way into Robinhood stock and accumulating shares on an ongoing basis.
