Meme stocks Returned to the spotlight this month, which put fintech and online brokerage Robinhood Markets (HOOD -3.82%) back in it as well. The company recently reported earnings that showed some stellar improvements in the business and gave some fundamental oomph to the stock that investors shouldn't take lightly.
While Robinhood remains a relatively minor player in what has become a highly competitive space, the company's improvements and improving financial position give the stock a long-term upside that makes it worthy of consideration to be part of a long-term portfolio.
Here are the specifics you need to know.
Incentives are winning over business
Robinhood is a well-known name in the investing community, most famous for its popularity with retail investors. The arguable downside of Robinhood's reputation as a trading platform rather than an investing brokerage is the company's lack of long-term committed funds. A year ago, Robinhood had an average of roughly $3,376 in assets under management (AUM) per funded account. Obviously, most people weren't keeping their life savings on the platform.
So the company began rolling out aggressive incentives to win over new business. That included offers such as a 1% boost on transferred accounts and individual retirement accounts that offered a match. A year later, Robinhood is seeing a big difference in its business. As of Q1 2024, Robinhood's funded account total rose roughly 810,000 year over year, but AUM rocketed to $130 billion, a 65% year-over-year bump.
That raises the average account value to $5,439. Robinhood still has work to do, but it's an excellent step in the right direction. Retirement accounts have far less activity than trading accounts, which should give Robinhood some financial stability. Currently, the business heavily depends on payment for order flow, which depends on trading volume. When investor activity stalls, so does Robinhood's business. Building a large base of stable, long-term-oriented AUM would strengthen Robinhood's ability to weather market ups and downs.
The business is profitable, with exciting new products on the way
Financially, Robinhood itself is far from being a meme stock. The company turned out a GAAP profit for three of the past four quarters, including $157 million in Q1, its largest by a long shot. While profits could dip if trading activity falters, it shows that Robinhood has grown to a size where it can be profitable. I expect earnings to grow as Robinhood picks up new users and more AUM, barring a market collapse that shutters investor activity.
The cool thing is that Robinhood is on the cusp of a significant product launch. The company recently announced its Robinhood Gold Card, which has the potential to become a tremendous profit stream.
Image source: Robinhood Q1 earnings.
Robinhood is locking its credit card and several of the platform's best perks behind a subscription paywall called Robinhood Gold. Investors can pay to unlock these products and perks. Robinhood seeks to replicate Amazon's success with Prime. In other words, it offers a value-packed subscription that could grow into a profitable revenue stream and distribution model for future products and services. As of Q1, Robinhood had 1.68 million Gold subscribers, a roughly 500,000 year-over-year increase.
Buy, sell, or hold the stock today?
The stock price is up roughly 150% over the past six months, so it's hard to say that Wall Street is sleeping on Robinhood now. The stock trades at a forward P/E of 22, while analysts expect earnings to grow by an average of 11% annually over the next several years:
HOOD PE Ratio (Forward) data by YCharts
This valuation puts investors at a crossroads. Assuming analysts accurately forecast Robinhood's earnings growth, shares are probably a hold. I generally like to buy stocks at a PEG ratio of 1.5 or less, and Robinhood's is sitting at 2.0 today. But it's not such an expensive valuation that investors couldn't do well if the business outperforms and analysts raise their estimates over time.
The Gold Credit Card is a big wild card that could impact Robinhood's business performance over the next several years. It only just began rolling out to waitlist users, a list with over 1 million sign-ups. If you're bullish on the business, investors could easily argue that it makes sense to buy shares to hold for the long term, even at these prices.
