Shares of Robinhood Markets (HOOD 3.11%) currently sit more than 70% below their all-time high, a milestone reached in August 2021. However, investors who bought more recently have been well rewarded -- the stock has more than doubled over the past year.
This fintech enterprise just reported strong financial results for the three-month period that ended March 31. Investors could view this as a potential sign that this business is worth putting money in.
Is Robinhood stock a buy right now? Here's what you need to know.
Impressive growth
While Robinhood's bread and butter is still its brokerage service, which allows users to buy and sell stocks and cryptocurrencies with no fees, this company has transformed over the years to become a more comprehensive financial services provider. Customers can also save for retirement and sign up for a credit card without leaving the platform. This helped drive 16% monthly active user growth for Robinhood in the first quarter.
Favorable market conditions boosted transaction-based revenue 59% to a total of $329 million. When the stock and cryptocurrency markets are rising like they have over the past year and a half or so, Robinhood benefits greatly, as people look to ride the momentum to investment gains.
There's something investors should know that presents a bit of a concern, though: This transaction revenue can be extremely volatile. In 2022, for example, when markets took a hit, sales in this area dipped 11% year over year.
One area that management has really tried to focus on in order to create a more stable and predictable business is its gold membership, which added 260,000 subscribers in Q1. This was the most subscriber sign-ups in three years. For $5 per month, these customers receive a range of compelling offerings, like higher rates on yields and IRA matches.
NASDAQ: HOOD
Key Data Points
Looking at profits
Businesses that are earlier in their lifecycle are typically focused on growth at all costs. This could still be an accurate description of Robinhood, as the company is just 11 years old right now. The leadership team continues to emphasize capturing new customers who move more of their money to the platform.
But investors will be encouraged to know that the business posted positive net income of $157 million in the first quarter. That's after reporting a net loss of $541 million in all of 2023. Management touts that 90% of Robinhood's cost structure consists of fixed expenses. So, as revenue grows over time, the company should be able to grow more profitable.
There's a caveat with the bottom-line performance that can't be ignored. Robinhood generated 41% of its revenue in Q1 from net interest income. New customers are depositing more cash on the app, and because interest rates are at elevated levels right now, Robinhood is able to earn solid income on these assets. Two years ago, in Q1 2022, net interest revenue represented just 18% of the company's total.
On the one hand, this tells me that the earnings benefit Robinhood is getting right now isn't sustainable. When interest rates start to fall, this moneymaker could dry up. But on the other hand, there's still the possibility that net interest revenue remains a key part of the business for the foreseeable future. As long as Robinhood is able to attract more customer deposits that stay uninvested, it creates a valuable revenue stream for the company to take advantage of. Investors should pay close attention to profitability trends going forward.
Not a buyer
I can't argue with the growth Robinhood continues to put up. And I appreciate management's ability to successfully launch new financial services products that resonate with consumers.
However, I'm not a buyer of the stock today. Shares trade at a steep price-to-sales ratio of 7.5. That's almost double the valuation of just six months ago. There's rising optimism surrounding this business.
Plus, I'm worried that a key revenue driver, interest income, will eventually reverse course and become a headwind to the financial results, which are already volatile, given the unpredictable nature of trading activity. I'll gladly pass on Robinhood today.
