loveguli/E+ via Getty Images With euphoria powering the stock market to new all-time highs, one big beneficiary of heightened trading activity is Robinhood (NASDAQ:HOOD). The tech-oriented brokerage has continued to pick up more net deposits while also enjoying a ballooning of asset values, powering the company’s revenue and path to profitability. A recent Q1 earnings print also did Robinhood plenty of favors, and pushed the stock’s year-to-date rally up to ~90% now. Still, I think there’s plenty of long-term upside left on the horizon. Data by YCharts I last wrote a bullish article on Robinhood in April, when the stock was on a temporary dip and trading in the high teens. At the time, I had encouraged investors to buy, noting that market volatility will come and go in waves, but Robinhood’s continued push for more deposits will ultimately lay out the foundation for its long-term growth trajectory. Even after the sharp rally since then, I am reiterating my buy rating on Robinhood – there’s plenty of steam left in this rally, especially after the company’s May month-end metrics (released in early June) point to a strong quarter ahead in Q2 as well. We’ll dig into the company’s tremendous Q1 results a bit more in the next section, but the thing to note upfront: Robinhood has attracted a bonanza of new funds, helping the company to accelerate its growth. Its strategy to expand its product flywheel, covering everything from retirement accounts to debit cards, is truly working. Over time, I see Robinhood truly becoming a mainstream brokerage and adding the last vestiges of a true full-service brokerage company (such as stock plan administration, which it currently doesn’t support). We also note that in spite of heightened incentives to draw in new funds (Robinhood is currently offering an unlimited 1% match on all brokerage account transfers, plus compensation for all transfer fees), the company has also massively expanded its profitability. Here’s a reminder as to my full long-term bull case on Robinhood: Robinhood’s younger customer base are amassing greater share of global wealth: More younger users are ditching traditional brokerages in favor of Robinhood’s platform. Though we may not see the impacts yet, over time Robinhood’s footing with the younger generation will give it the leading position among asset managers. Continued, furious deposit growth: More and more users continue to sign up for Robinhood accounts (helping to offset less trading volume per account) while the company rakes in billions in deposits each quarter, fueling interest income. Aggressive product development roadmap keeps Robinhood fresh: Part of what makes Robinhood so appealing is that it’s often first-to-market (or at least, first to popularize) many new key features. Crypto trading, cash advances, 24-hour trading for select stocks, and easy access to low-cost margins were some of Robinhood’s key defining advantages. Retirement accounts will help to attract an even wider pool of assets to Robinhood. Credit card offerings will push Robinhood to become more of a bank than just a simple brokerage. International expansion. Robinhood just launched in the UK in March of 2024, with more countries on the roadmap soon. Multiple paths to monetization: When interest rates were low and cash was cheap, Robinhood benefited from buoyant market activity. But now, as interest rates have shot up and put a chill over trading volumes, Robinhood is benefiting from higher interest spreads. Put in other words, Robinhood has now navigated through a recessionary cycle and has proven itself capable of sustaining growth through its wide product portfolio. Profitable bones: Management has taken a very disciplined approach to opex, laying off just under 10% of its workforce in 2023 and planning only modest opex growth in 2024. With net interest income fueling very high margin revenue, Robinhood has soared to tremendous adjusted EBITDA profitability. Stay long here: Robinhood still has plenty of upside with so many of its core metrics showing such positive signals. Q1 download: acceleration driven by both net deposit growth as well as heightened trading activity Let’s now go through Robinhood’s latest quarterly results in greater detail. The key highlights from Q1 are captured in the snapshot below: Robinhood Q1 highlights (Robinhood Q1 earnings deck) The big highlight: the company increased its count of funded customers by 0.5 million in Q1 to end at 23.9 million total customers. In previous quarters, as shown above, it was more normal to add only 0.1 million net-new funded customers per quarter. Net deposits in the quarter, meanwhile, totaled $11.2 billion, up 44% y/y and accelerating versus 21% y/y growth in Q4. Some portion of this is due to Robinhood’s heightened transfer incentives, and some portion is also due to general bullishness in the markets as bears get fatigued from challenging the rally and jump in. More context on deposits from CFO Jason Warnick’s remarks on the Q1 earnings call: First, we saw strong participation from both existing and new customers, with about 75% of net deposits coming from customers who’ve been at Robinhood for over a year. Second, we saw a nice mix of continued strong contributions from customers and wins versus brokerage incumbents. The mix was about 75% contributions from customers and 25% net wins from incumbents. And third, deposits into our platform were balanced across product categories, a little more than half of Q1 net deposits went to brokerage, another quarter went to cash sweep, and the last 20% to retirement. So overall, we are really pleased with the diversity of net deposits as customers engage with us across our platform. Looking at Q2, so far it’s off to a good start as well, as April was our highest month of the year for net deposits with nearly $5 billion. And with our continued progress in early May, we’ve already brought in more net deposits year-to-date than the $17 billion we did in all of 2023, with most of the year still in front of us.” We note that Robinhood is far more transparent than most companies in that it’s now providing monthly updates on key metrics including funded account growth, assets under custody, and trading activity. Robinhood monthly trended metrics (Robinhood May metrics release) As shown above, funded accounts were up another 0.1 million in May (what the company used to add in a single quarter), while trading volume increased 76% y/y. It’s important to note that Robinhood’s revenue acceleration is driven by both new deposits as well as a recovery in trading activity. As shown in the chart below, Q1 revenue of $618 million was up 46% y/y, with transactional revenue growth of 59% y/y leading the charge. Robinhood revenue breakdown (Robinhood Q1 earnings deck) This accelerated sharply from total revenue growth and transactional revenue growth of 24% y/y and 8% y/y in Q4, respectively. And we look ahead to even more improvement in Q2: we note that the May trended results show 238% y/y growth in crypto trading (slightly better than 232% y/y in Q1). It’s in crypto trading that Robinhood earns the highest spreads (followed by options, then equities), so this is a great signal for Q2 revenue. The company’s top-line strength has also carried well into adjusted EBITDA expansion, which hit a record 40% margin in Q1 – a 14 point y/y improvement from a 26% margin in the first quarter of 2023. Robinhood adjusted EBITDA (Robinhood Q1 earnings deck) Risks and key takeaways Clearly, the wind is at Robinhood’s back: but we should be mindful of a number of risks. Robinhood is extremely correlated with how the rest of the market is doing: when the market is up and traders are bullish, trading activity will soar, but when the market contracts, Robinhood will also suffer. We should also note that while interest rate cuts may benefit stock valuations and trader optimism, it will cut into Robinhood’s net interest income, which was 41% of total company revenue in Q1. That being said, with the May metrics as well as Q1 trends pointing to a very strong year ahead for Robinhood, I see further upside ahead for this company. Continue to stay long here and ride the upward trend. a
sekar nallalu Cryptocurrency,Gary Alexander,HOOD Robinhood Stock: Keep Riding This Rally (NASDAQ:HOOD)