The S&P 500 index plunged into a bear market near the start of 2022 that bottomed out in late October. The current bull market started then, but final confirmation that bull market was actually underway didn't come until new all-time highs were hit in late 2023. The bull continues to march higher in 2024, setting multiple record highs along the way. That volatility can be unsettling for some investors, but it's what the brokerage firms that serve those investors thrive on.
Robinhood Markets (HOOD 3.59%) and Interactive Brokers (IBKR 1.09%) are two popular online-only brokerages that offer clients the ability to invest in stocks, options, cryptocurrencies, and more. However, their businesses have some differences and serve different clientele. For instance, Robinhood's users tend to be young, often first-time investors while Interactive is a go-to platform for more-experienced investors and financial advisors.
But are publicly traded companies which begs the question: Which stock-trading platform operator has the better stock for your portfolio? Let's find out.
NASDAQ: HOOD
Key Data Points
The case for Robinhood
After going public in mid-2021 at $38 a share, Robinhood stock quickly rocketed to an all-time high of $85. Investors were impressed by the company's ability to attract new users, even though some of those users were simply signing up to participate in the meme stock craze going on at the time. During the second quarter of 2021, the Robinhood platform grew to 21.3 million monthly active users.
Unfortunately, that market-rallying second quarter market the peak of active users and the peak for its stock price. In the first quarter of 2024, Robinhood reported just 13.7 monthly active users, down 35% from its all-time high. Similarly, its stock currently trades around $21, which is 70% below its best-ever share price.
On the plus side, Robinhood's active user base is growing again after bottoming out at 10.3 million in Q3 of 2023. The company also said its assets under custody soared 65% year over year in Q1 2024 to $130 billion. That figure is important because brokers earn fees based on transaction volume -- and more assets will typically drive more revenue.
Robinhood's transaction revenue jumped 59% year over year in Q1 to $329 million, driven largely by a 232% increase in revenue from cryptocurrency trading. Total revenue (which includes interest income) was up 40% in Q1 to $618 million, and thanks to a slate of cost cuts, the company also delivered a Q1 GAAP profit of $157 million after losing $511 million in the year-ago period.
Simply put, things are looking up for Robinhood's business following a tumultuous period after the 2021 meme frenzy ended. Plus, it continues to expand its business with the introduction of retirement accounts last year, and innovations like 24-hour trading for certain stocks.
NASDAQ: IBKR
Key Data Points
The case for Interactive Brokers
Unlike Robinhood, Interactive Brokers stock is trading at an all-time high. The company grows at a slower but more reliable pace, with healthy profitability and a sticky client base. At the end of the first quarter of 2024, Interactive had 2.75 million customers on board, which was a record high and a 25% increase from the year-ago period.
Its assets under custody surged 36% to $465.9 billion, which was also a record. Therefore, despite having a fraction of the clients compared to Robinhood, Interactive has more than triple the assets from which to earn fees. As I touched on at the top, Interactive targets experienced investors, and it also offers specialized services for hedge funds and financial advisors.
Interactive's clients primarily invest in stocks, futures contracts, and options. Stock volume fell 16% year over year during Q1, mainly because the S&P 500 climbed steadily with minimal volatility, so investors weren't frequently buying and selling. Options volume, however, jumped 24% year over year, which is a sign investors were actively seeking out riskier bets. That was good news for Interactive, because it makes more money per transaction from options compared to stocks.
The company generated $1.2 billion in total revenue during Q1, which was an increase of 13.9% from the year-ago period. $456 million came from commissions and fees, representing growth of 8.8%. Interest income accounted for the other $747 million, which was a 17% increase.
Interest income comes from two primary sources. First, Interactive earns interest on its cash and the cash it holds on behalf of clients, and second, it earns interest on the $51.2 billion in outstanding margin loans to clients, which they use to buy stocks and other securities.
On the bottom line, Interactive generated $795 million in after-tax net income during Q1, which brings its trailing 12-month total to $2.9 billion. Robinhood has lost money over the same 12-month period.
The verdict
Based on Robinhood's trailing 12-month revenue of $2 billion and its market capitalization of $19.3 billion, its stock trades at a price-to-sales (P/S) ratio of 9.4. The company isn't profitable, so we can't calculate its price-to-earnings (P/E) ratio, which is more widely used by investors.
Interactive Brokers stock trades at a P/S ratio of 11.9, making it a little more expensive than Robinhood. However, it also trades at a P/E ratio around 21.8, which represents a 6% discount to the S&P 500 index. Therefore, based on a more widely used valuation metric, Interactive stock is actually cheaper than the broader market.
While Interactive has fewer clients than Robinhood, it has more than triple the assets under custody, so it has more revenue-generating potential over the long term. Plus the average Robinhood client is in their early 30s, so the platform could be susceptible to volatility in its asset base as they withdraw from the markets to fund milestones in their life like buying a home, getting married, and having children.
Finally, it's unclear whether Robinhood will continue experiencing such a strong tailwind from cryptocurrency trading. The industry's leading coin Bitcoin is trading near an all-time high right now, but it was only two years ago when it collapsed 65% and dented investors' confidence. That could happen again, and if history is any guide, there won't be much warning.
For all of the above reasons, I think Interactive Brokers stock is the safer bet over the long term, especially given its current discount to the S&P 500.
CLARIFICATION: Interactive Brokers' net income was misstated in the original version of this report. The company distinguishes between net income and net income available to common stockholders because of the size of management's interest.
