Why I Believe Robinhood Stock Will Crush Upcoming Q1 Earnings (NASDAQ:HOOD)

Editor’s note: Seeking Alpha is proud to welcome Rex Investing as a new contributing analyst. You can become one too! Share your best investment idea by submitting your article for review to our editors. Get published, earn money, and unlock exclusive SA Premium access. Click here to find out more »

With this article, I’d like to take you through why I believe Robinhood (NASDAQ:HOOD) stock can run up to and above $20/share after earnings on Wednesday 8th after closing bell.

Background:

Investing in Robinhood has been a shareholder nightmare since its IPO in 2021. The company is still more than 50% below its IPO price so shareholders who bought at IPO have not recovered yet on their initial investment.

The company IPO happened right at the end of the covid pandemic, just when markets started to capitulate. During a bear market, retail investors step away or trade less, causing brokers to make less money. Hence Robinhood IPO was poorly timed.

What has changed since IPO?

The narrative has changed since the doomsdays of 2022: people have now returned to trading after a very bullish 2023 in the stock and Crypto markets. If we compare February 2024 to February 2024, trading volumes have drastically increased with +41% on Equity, +33% on Options and a stunning +86% on Crypto.

What is even more encouraging is that the numbers are up also on a MoM basis. By comparing February 2024 vs. January 2024 we can see Equity volume up 36%, Options volume up 12% and Crypto volume up 10%. With Bitcoin reaching new highs and the halving having just taken place, I expect the increase in Crypto trading to continue in 2024 and 2025.

If we zoom out we can see that Crypto volume trend has been up since September 2023, with the exception of January 2024 which was slightly down at $5.9 billion. December 2023, January 2024 and February 2024 show Crypto volumes higher than any month in 2023, which leads me to think the trend is here to stay.

If we move over to the customer deposits, the trend has also been very positive with February 2024 seeing a +59% growth vs. February 2023 and a 16% growth MoM.

If we zoom out again, we can see the trend has been up since the lows of September/October 2023.

The increase in net deposits is also due to the success of Robinhood retirement product which was launched just in January 2023. This product has been well received and is poised to continue to attract capitals.

Finally, if we look over the net income side, we can see that the tide has turned and Robinhood is not losing money anymore and has delivered flattish earnings for the past three quarters, after 2 years of constant bleeding. This shows that the trend inversion for Robinhood earnings is well underway.

Balance Sheet:

Looking at the balance sheet, we can see that the company holds no debt and has a cash position of $4.8B. This means that the company is highly solvable and its market cap today is only 3x its cash position. The company used to have an even higher cash position but it smartly used it to buy back shares when they were cheaper vs. today.

If we look at revenues, the company has grown from Q4 22 $380M to Q4 23 $471M, which is a 24% increase. With such growth, you would expect the company to have grown its operating expenses significantly. They did not: Robinhood operating expenses stayed almost flat and currently sit at $525M (quarterly). If the company can continue growing at the current pace or even accelerate, whilst keeping expenses in control, I can only see profits rising from here.

Catalysts:

Additional catalysts that I believe will contribute to Robinhood growth are the launch of Robinhood gold card and expansion to the UK.

Gold card for Premium members:

On March 26 Robinhood launched a new Gold card that received extraordinary praise and attention on social media. The benefits of the card, besides the fact that is actually made of gold, are lack of annual fees and 3% cash back. This has enriched Gold membership perks, making the gold subscription even more appealing.

International expansion:

Robinhood made its debut in March in the UK market, marking its first expansion outside of the US. I believe this is just the beginning of Robinhood international expansion. If you look at UK or European customers, the only options available besides local banks are cumbersome brokers like Interactive Brokers or Degiro, which means that Robinhood has an incredible potential to expand.

Let’s take a look at why I believe International expansion will be super successful.

If we take EU, UK and Switzerland, It’s very hard to find cost competitive brokers. I’ll now compare some of the most popular options available in Europe.

Fineco (Italy)

Fineco is an amazing internet bank and broker, with a simple interface and well-rounded offering. From a cost perspective though, the gap is significant. The standard price to trade US stocks with Fineco is $12.95. It doesn’t get more competitive even for local markets, with €19 for a trade on Italian stock markets.

Swissquote (Switzerland)

Swissquote pricing is even worse than Fineco. Execution price goes up with trading size. So assuming your trade on NYSE is $10.000 worth, you would pay $55. If your trade was $50.000 worth, you’d pay a whopping $190. This makes any trading besides buy and hold almost impossible for retail trader, as they would be charged up to 3% per individual trade.

IG (UK)

IG is actually the most competitive, possibly because the UK has the most developed stock market across Europe. Up to 50 shares traded, there are no explicit fees. Over 50 trades, charges jump to $5 per trade, creating a significant gap for active traders vs. what Robinhood offers (free trading)

Technical analysis:

From a technical chart perspective, Robinhood has broken out of a large two year base. Furthermore, Robinhood has recently corrected back to its 50 day moving average shortly breaking it but quickly bouncing back above it, which is another bullish signal. The RSI, which was overbought, is now in neutral territory. The next resistance visible on chart is around price $36 so, unless fundamentals deteriorate, Robinhood is poised to run from here.

Valuation:

Assuming the company can show in the next quarter a revenue acceleration that puts them on track for annual revenues of $3B/year and assuming operating costs stay flat at current levels, the company can achieve $1B net profit and hence be worth 20$/share, using as P/E multiple of 20.

To get to this multiple, I’ve taken Interactive Brokers multiple, which is currently 20. I think this is a conservative P/E to use, given the growth prospects of Robinhood.

Risks:

• International expansion could be slowed by the cumbersome EU regulatory apparatus
• International brokers might start to decrease fees hence making it less convenient for users to switch away
• A sudden bear market could reduce again Robinhood revenues, even though new retirement products will provide a sound backup that was not available in previous market correction in 2022

Robinhood MOAT summary:

• Unbeatable simple user interface. This is the hardest part to copy. Many brokers like Interactive brokers have tried simplifying their interface with little to no result
• No fees. Brokers are heavily reliant on trade fees to survive. Legacy brokers will struggle to adapt to the new environment of zero fees whereas Robinhood will strive in this environment, having already adapted itself to making money in other ways.
• Youth appeal. Robinhood appeals to youth thanks to a complete offer that includes crypto trading, retirement and trendy card products.

Conclusion:

In conclusion, I believe that Robinhood will surprise its shareholders on the next earnings event on May 8th after the bell. The reason is that Robinhood has completed a perfect turnaround after two years of stagnation and has lot of catalysts from macro-environment (Crypto bull market), product innovation (Gold Card, Retirement product) market expansion (UK) and technical analysis.

I believe the stock will drift to or above 20$ a share post-earnings.