It's been a fantastic start to 2024 for Robinhood Markets (HOOD +2.53%). As of this writing, shares are up 46% this year. This gain was boosted by Q4 2023 financial results that were certainly well-received by the market.
Investor enthusiasm seems to be on the way up with this booming fintech stock. But it still remains 74% below its peak price, which was set in August 2021. If you're considering buying shares, let's first look at both the positive and negative factors with Robinhood before coming to an informed decision.
The bull case: Strong innovation pipeline
When Robinhood was founded in 2013, it completely upended the brokerage industry by allowing investors to trade stocks with zero commissions and in fractional shares. This kicked off a race among rivals to copy this free strategy, which one could argue has really democratized access to the stock market for the average person.
This points to what I believe is the single most compelling reason to be bullish on Robinhood: The business has a strong innovation pipeline. The company is slowly transforming into a full-on financial services provider for its users.
The flagship brokerage platform also facilitates cryptocurrency trading. Plus, Robinhood offers retirement accounts, debit and credit cards, and an attractive savings yield on deposits. A mobile-first approach that leans into technology creates a better user experience.
I'll also point to the company's Gold subscription, which posted a 25% membership increase in Q4. For just $5 a month, subscribers receive added features, like a higher savings rate, IRA matching, instant deposits, and access to stock research services.
Management's primary growth strategy is to continue introducing new features that can keep its existing customers happy, driving greater deposit inflows and usage while also bringing on new users. Tapping international markets is another growth pillar.
NASDAQ: HOOD
Key Data Points
Long list of reasons to be bearish
Innovation might be a strength at Robinhood, but I see no shortage of reasons to be bearish about the business right now. These factors will certainly make investors think twice about buying the stock.
The S&P 500 and Nasdaq Composite had fantastic years in 2023, up 24% and 43%, respectively. But Robinhood saw its transaction-based revenue decline by 4%. In a soaring bull market, I'd expect that figure to increase at a fast clip.
Even more alarming, the company's monthly active user base shrunk by 4% in Q4 on a year-over-year basis. Again, when investor enthusiasm is high, like it has been since the start of 2023, you'd think Robinhood would be bringing on a lot more customers.
For all of 2023, Robinhood reported a 37% sales gain to $1.9 billion. But it's worth mentioning that 50% of that revenue was derived from interest income.
The business has $9.3 billion combined of cash and cash equivalents and client funds on the balance sheet that it earns interest on. Thanks to the Federal Reserve's aggressive rate-hiking moves in the past couple of years, Robinhood has benefited. But this isn't core to the business, nor is it sustainable, particularly if we start to see interest rate drops in the near future.
Another bear argument is simply that Robinhood isn't consistently profitable. To be fair, it did register positive net income in the second and fourth quarters last year. And the company's leadership is focused on cutting costs.
But I think this adds a lot of risk to the investment thesis. If it weren't for the massive amounts of interest income being earned, Robinhood would still be well in the red.
Even though the stock is significantly below its all-time high, shares trade at a steep valuation. Investors can buy the stock at a price-to-sales ratio of 8.9. I believe that prices in way too much optimism about the company's future, providing another reason to pass on Robinhood.
