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HOOD Falls 15.7% in a Week: Is it a Buy Before Q2 Earnings?
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Robinhood Markets (HOOD - Free Report) , slated to announce second-quarter 2024 results on Aug 7, tanked 15.7% in the past week.
Also, the stock is trading significantly below the industry it belongs to.
Image Source: Zacks Investment Research
So, is it a good idea to add the HOOD stock to your portfolio just before the release of its second-quarter earnings? Before we analyze the stock’s investment worthiness, let’s check out the company’s historical performance and how it is expected to fare this time.
Robinhood has an impressive earnings surprise history. The company’s earnings outpaced the Zacks Consensus Estimate in each of the trailing four quarters, with an average beat being 230%.
Image Source: Zacks Investment Research
Now, let’s check out how HOOD is expected to fare in terms of revenues and earnings this time. The Zacks Consensus Estimate for the to-be-reported quarter revenues of $629.75 million suggests a 29.6% improvement on a year-over-year basis.
In the past month, the consensus estimate for the second-quarter earnings has been revised 7.1% upward to 15 cents. This indicates a whopping 400% jump from the prior-year quarter.
Image Source: Zacks Investment Research
Major Q2 Factors & Estimates
During the second quarter, client activity was robust, with the major indexes touching all-time highs. This is expected to have supported Robinhood’s transaction revenues like its peer Interactive Brokers (IBKR - Free Report) . IBKR, which released its second-quarter results on Jul 16, witnessed a 26.1% year-over-year jump in commissions.
The Zacks Consensus Estimate for HOOD’s transaction-based revenues is pegged at $282 million, indicating a 46.1% surge from the prior-year reported number. This is likely to have been driven by higher options, equity and cryptocurrencies transaction revenues.
The consensus estimate for options transaction revenues stands at $152.6 million, suggesting 20.2% growth. Further, the Zacks Consensus Estimate for equity and cryptocurrencies transaction revenues are $36.1 million and $82 million, respectively. Equity transaction revenues are projected to surge 44.6%, while cryptocurrencies transaction revenues are estimated to jump 167.4% year over year.
Further, higher interest rates are expected to have immensely supported Robinhood’s net interest income (NII) in the to-be-reported quarter. The Federal Reserve kept the interest rates unchanged at a 23-year high of 5.25-5.5% during the second quarter. Thus, the consensus estimate for NII is $274.4 million, implying a 17.2% rise.
The Zacks Consensus Estimate for other revenues stands at $67.9 million, suggesting a 61.6% increase from the prior-year quarter.
On the cost front, total operating expenses are likely to remain elevated as the company invests in key areas to enhance platform capabilities, drive product innovation, improve customer support and build upon regulatory and compliance functions.
In the to-be-reported quarter, HOOD announced plans to acquire Bitstamp for almost $200 million. Bitstamp's core spot exchange, which features more than 85 tradable assets, along with its popularity in Europe and Asia, will significantly enhance the company’s crypto offerings.
HOOD is also contemplating offering cryptocurrency futures in the United States and Europe soon. Further, it intends to launch CME-based futures in the United States for Bitcoin and Ether. These initiatives are expected to have resulted in a rise in expenses.
Further, the company could be increasing its legal reserve as it received a Wells notice from the U.S. Securities and Exchange Commission concerning the tokens traded on its platform in May. The notice came because of the alleged violation of registrations as a securities broker and transfer agent.
What Our Model Unveils
Our proven model doesn’t predict an earnings beat for Robinhood this time. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. That is not the case here, as you can see below.
Robinhood has an Earnings ESP of -1.83%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Let’s look at the value Robinhood offers investors at current levels.
Currently, HOOD is trading at 2.40X 12-month trailing Price/Tangible Book (P/TB), above its two-year median of 1.36X. Meanwhile, the industry’s P/TB TTM multiple sits at 4.41X. The company’s valuation looks cheap compared with the industry average. Also, the stock is trading well below its peer, Tradeweb Markets Inc. (TW - Free Report) . At present, TW is trading at 10.07X 12-month trailing P/TB TTM.
Image Source: Zacks Investment Research
Hence, from a valuation perspective, Robinhood shares present an attractive buying opportunity. The stock is still undervalued as the market has yet to fully recognize or price the company’s growth prospects.
Investment Thesis
Robinhood is on the right path to expand/diversify operations. Given the volatility in the stock market because of several macroeconomic developments, the company will keep benefiting from rising trading volume.
Apart from this, HOOD’s initiatives to keep adding new products and services and plans to become a global entity by venturing across Europe and Asia Pacific regions, organically and through buyouts, align with its expansion efforts. Hence, the company is well-poised to ride the growth trajectory.
Also, in May, Robinhood announced a share buyback plan, authorizing the repurchase of up to $1 billion worth of shares. While the plan doesn’t have an expiration date, the company expects to buy back shares in two to three years, starting from third-quarter 2024.
Should You Buy HOOD Now?
A favorable operating backdrop, strategic inorganic expansion plans, efforts to diversify the top line to become less dependent on transaction revenues and the launch of new products and services position Robinhood favorably for robust second-quarter results.
With a favorable valuation compared with the industry and industry peers, and strong earnings projections, the company is well-poised to deliver sustained growth. We believe the HOOD stock is an ideal candidate for investors' portfolio addition.
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HOOD Falls 15.7% in a Week: Is it a Buy Before Q2 Earnings?
Robinhood Markets (HOOD - Free Report) , slated to announce second-quarter 2024 results on Aug 7, tanked 15.7% in the past week.
Also, the stock is trading significantly below the industry it belongs to.
Image Source: Zacks Investment Research
So, is it a good idea to add the HOOD stock to your portfolio just before the release of its second-quarter earnings? Before we analyze the stock’s investment worthiness, let’s check out the company’s historical performance and how it is expected to fare this time.
Robinhood has an impressive earnings surprise history. The company’s earnings outpaced the Zacks Consensus Estimate in each of the trailing four quarters, with an average beat being 230%.
Image Source: Zacks Investment Research
Now, let’s check out how HOOD is expected to fare in terms of revenues and earnings this time. The Zacks Consensus Estimate for the to-be-reported quarter revenues of $629.75 million suggests a 29.6% improvement on a year-over-year basis.
In the past month, the consensus estimate for the second-quarter earnings has been revised 7.1% upward to 15 cents. This indicates a whopping 400% jump from the prior-year quarter.
Image Source: Zacks Investment Research
Major Q2 Factors & Estimates
During the second quarter, client activity was robust, with the major indexes touching all-time highs. This is expected to have supported Robinhood’s transaction revenues like its peer Interactive Brokers (IBKR - Free Report) . IBKR, which released its second-quarter results on Jul 16, witnessed a 26.1% year-over-year jump in commissions.
The Zacks Consensus Estimate for HOOD’s transaction-based revenues is pegged at $282 million, indicating a 46.1% surge from the prior-year reported number. This is likely to have been driven by higher options, equity and cryptocurrencies transaction revenues.
The consensus estimate for options transaction revenues stands at $152.6 million, suggesting 20.2% growth. Further, the Zacks Consensus Estimate for equity and cryptocurrencies transaction revenues are $36.1 million and $82 million, respectively. Equity transaction revenues are projected to surge 44.6%, while cryptocurrencies transaction revenues are estimated to jump 167.4% year over year.
Further, higher interest rates are expected to have immensely supported Robinhood’s net interest income (NII) in the to-be-reported quarter. The Federal Reserve kept the interest rates unchanged at a 23-year high of 5.25-5.5% during the second quarter. Thus, the consensus estimate for NII is $274.4 million, implying a 17.2% rise.
The Zacks Consensus Estimate for other revenues stands at $67.9 million, suggesting a 61.6% increase from the prior-year quarter.
On the cost front, total operating expenses are likely to remain elevated as the company invests in key areas to enhance platform capabilities, drive product innovation, improve customer support and build upon regulatory and compliance functions.
In the to-be-reported quarter, HOOD announced plans to acquire Bitstamp for almost $200 million. Bitstamp's core spot exchange, which features more than 85 tradable assets, along with its popularity in Europe and Asia, will significantly enhance the company’s crypto offerings.
HOOD is also contemplating offering cryptocurrency futures in the United States and Europe soon. Further, it intends to launch CME-based futures in the United States for Bitcoin and Ether. These initiatives are expected to have resulted in a rise in expenses.
Further, the company could be increasing its legal reserve as it received a Wells notice from the U.S. Securities and Exchange Commission concerning the tokens traded on its platform in May. The notice came because of the alleged violation of registrations as a securities broker and transfer agent.
What Our Model Unveils
Our proven model doesn’t predict an earnings beat for Robinhood this time. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. That is not the case here, as you can see below.
Robinhood has an Earnings ESP of -1.83%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
It carries a Zacks Rank #2 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Valuation
Let’s look at the value Robinhood offers investors at current levels.
Currently, HOOD is trading at 2.40X 12-month trailing Price/Tangible Book (P/TB), above its two-year median of 1.36X. Meanwhile, the industry’s P/TB TTM multiple sits at 4.41X. The company’s valuation looks cheap compared with the industry average. Also, the stock is trading well below its peer, Tradeweb Markets Inc. (TW - Free Report) . At present, TW is trading at 10.07X 12-month trailing P/TB TTM.
Image Source: Zacks Investment Research
Hence, from a valuation perspective, Robinhood shares present an attractive buying opportunity. The stock is still undervalued as the market has yet to fully recognize or price the company’s growth prospects.
Investment Thesis
Robinhood is on the right path to expand/diversify operations. Given the volatility in the stock market because of several macroeconomic developments, the company will keep benefiting from rising trading volume.
Apart from this, HOOD’s initiatives to keep adding new products and services and plans to become a global entity by venturing across Europe and Asia Pacific regions, organically and through buyouts, align with its expansion efforts. Hence, the company is well-poised to ride the growth trajectory.
Also, in May, Robinhood announced a share buyback plan, authorizing the repurchase of up to $1 billion worth of shares. While the plan doesn’t have an expiration date, the company expects to buy back shares in two to three years, starting from third-quarter 2024.
Should You Buy HOOD Now?
A favorable operating backdrop, strategic inorganic expansion plans, efforts to diversify the top line to become less dependent on transaction revenues and the launch of new products and services position Robinhood favorably for robust second-quarter results.
With a favorable valuation compared with the industry and industry peers, and strong earnings projections, the company is well-poised to deliver sustained growth. We believe the HOOD stock is an ideal candidate for investors' portfolio addition.