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Will Interest Rate Cuts Hurt Robinhood and Halt HOOD Stock Rally?
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The Federal Reserve announced a jumbo 50 basis point (bp) cut in interest rates on Sept. 18 for the first time since March 2020. The central bank has indicated two more cuts this year and four in 2025.
Against this backdrop, how will Robinhood Markets, Inc. (HOOD - Free Report) perform? The company earns massive revenues from interest income. In 2023, net interest revenues of $929 million (50% of total revenues) surged a whopping 119% year over year, driven by four-decade-high interest rates. A similar trend continued in the first half of 2024 too.
Revenue Sources
Image Source: Robinhood Markets, Inc.
On the second-quarter earnings call, Jason Warnick, HOOD’s chief finance officer, stated that a 25-bp cut in interest rates will likely lower its net interest revenues by almost $40 million. He added, “Over half of the balance of interest-earning assets relates to our cash sweep and the spread we earn there is relatively fixed, which minimizes the impact of changes in rates.”
Also, Robinhood has been broadening its product suite to align with customer needs. This is expected to result in a more diversified business. This is driving investors’ confidence in the stock. Since the Fed cut the rates, shares of the company have gained 4.1%.
Moreover, HOOD stock has skyrocketed 87.5% this year. This impressive run has significantly outpaced the 17.7% rise of the industry it belongs to and the 20.5% growth of the Zacks S&P 500 composite. Further, the stock is trading well above its close peer, Charles Schwab (SCHW - Free Report) .
YTD-Month Price Performance
Image Source: Zacks Investment Research
Will the bull run continue for HOOD stock? It is essential to delve into the details and analyze various factors.
Factors Supporting Robinhood
Diversifying Business: Robinhood became extremely popular among younger generations riding on the meme stock wave in early 2021. Yet, since its IPO in July 2021, a lot has happened on the company front.
Robinhood has evolved from a brokerage firm mainly trading in digital assets to a more mature and diversified entity as it expanded into retirement and credit card accounts. Looking at the numbers, in 2021, HOOD majorly depended on transaction-based revenues (almost 75% of total revenues) to generate income. In 2023, this came down to 42% of total revenues.
In July 2024, Robinhood acquired Pluto Capital Inc., an innovative artificial intelligence-powered investment research platform. This marked a significant step as the company aims to enhance its offerings with intelligent, data-driven investing tools. With the integration of Pluto’s advanced capabilities, the company is set to revolutionize the investment experience for its users.
This is part of HOOD’s broader strategy to expand its global and domestic footprint and become a comprehensive financial services provider. In sync with this, the company announced plans to acquire Bitstamp, the global cryptocurrency exchange, for approximately $200 million in June 2024. The move underscores the company's commitment to diversifying its product offerings beyond traditional transaction-related revenues.
With this impending acquisition, Robinhood positions itself to compete directly with major crypto exchanges like Binance and Coinbase Global, Inc. (COIN - Free Report) . Bitstamp's core spot exchange, which features more than 85 tradable assets, coupled with its popularity in Europe and Asia, will significantly enhance Robinhood’s crypto offerings.
Revenue Expectations: The company also launched its trading app in the U.K. this March. HOOD is contemplating offering cryptocurrency futures in the United States and Europe soon.
Further, it plans to launch Chicago Mercantile Exchange CME (Chicago Mercantile Exchange)-based futures in the United States for Bitcoin and Ether. Since the approval of U.S. Bitcoin exchange-traded funds (ETFs) in January, the demand for futures has risen. Robinhood intends to capitalize on this to diversify revenues.
Initiatives to change the revenue mix give HOOD solid leverage.
Sales Estimates
Image Source: Zacks Investment Research
HOOD Rewards Shareholders: In May, Robinhood announced a share buyback plan. The company’s board of directors approved a share repurchase program, authorizing it to buy back up to $1 billion of its outstanding common stock.
While the plan doesn’t have an expiration date, the company expects to buy back shares in two to three years, starting from the third quarter of 2024.
Robinhood is on solid ground, with ample cash reserves. As of June 30, 2024, it reported cash and cash equivalents of $4.5 billion.
Robinhood Faces Regulatory Issues
Robinhood's push into the global crypto market comes amid ongoing regulatory challenges in the United States. Earlier this month, the company agreed to pay $3.9 million as a settlement with the California Department of Justice over crypto withdrawals. It was alleged that the company prevented its customers from withdrawing cryptocurrency from their accounts between 2018 and 2022.
Additionally, in May 2024, the company received a Wells notice from the U.S. Securities and Exchange Commission (“SEC”) concerning the tokens traded on its platform, reflecting the complex regulatory landscape for crypto firms.
The notice came because of the alleged violation of registrations as a securities broker and transfer agent.
Likewise, the SEC filed a lawsuit against Coinbase in June 2023 on the allegations of operating an unregistered exchange by allowing the sale of certain crypto tokens the agency considers as investment securities and, hence, part of the SEC’s jurisdiction.
HOOD Stock has More Upside Left
Analysts seem bullish about Robinhood’s prospects. Over the past two months, the Zacks Consensus Estimate for 2024 and 2025 earnings has moved upward.
Estimate Revision Trend
Image Source: Zacks Investment Research
This upward adjustment reflects a positive sentiment among analysts and suggests encouraging prospects.
Despite the massive rally, HOOD stock is still undervalued. Currently, the stock is trading at 3.13X 12-month trailing price/tangible book (P/TB), below the industry’s P/TB TTM multiple of 5.09X. Also, the stock is trading well below SCHW, which is trading at 7.98X 12-month trailing P/TB TTM.
Price-to-Tangible Book Ratio (TTM)
Image Source: Zacks Investment Research
Hence, from a valuation perspective, Robinhood shares present an attractive buying opportunity as the market is yet to fully recognize or price the company’s growth prospects.
A thorough analysis shows that Robinhood is on the right path to expand/diversify operations. With the stock market rally likely to continue because of several favorable macroeconomic developments, the company will keep benefiting from the rising trading volume despite lower interest rates.
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. The company is well-poised to ride the growth trajectory.
The positive sentiments of analysts are echoed in the upward estimate revision trends and compelling valuation. All these factors indicate that betting on this Zacks Rank #1 (Strong Buy) stock now will be a wise investment move. You can see the complete list of today’s Zacks #1 Rank stocks here.
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Will Interest Rate Cuts Hurt Robinhood and Halt HOOD Stock Rally?
The Federal Reserve announced a jumbo 50 basis point (bp) cut in interest rates on Sept. 18 for the first time since March 2020. The central bank has indicated two more cuts this year and four in 2025.
Against this backdrop, how will Robinhood Markets, Inc. (HOOD - Free Report) perform? The company earns massive revenues from interest income. In 2023, net interest revenues of $929 million (50% of total revenues) surged a whopping 119% year over year, driven by four-decade-high interest rates. A similar trend continued in the first half of 2024 too.
Revenue Sources
Image Source: Robinhood Markets, Inc.
On the second-quarter earnings call, Jason Warnick, HOOD’s chief finance officer, stated that a 25-bp cut in interest rates will likely lower its net interest revenues by almost $40 million. He added, “Over half of the balance of interest-earning assets relates to our cash sweep and the spread we earn there is relatively fixed, which minimizes the impact of changes in rates.”
Also, Robinhood has been broadening its product suite to align with customer needs. This is expected to result in a more diversified business. This is driving investors’ confidence in the stock. Since the Fed cut the rates, shares of the company have gained 4.1%.
Moreover, HOOD stock has skyrocketed 87.5% this year. This impressive run has significantly outpaced the 17.7% rise of the industry it belongs to and the 20.5% growth of the Zacks S&P 500 composite. Further, the stock is trading well above its close peer, Charles Schwab (SCHW - Free Report) .
YTD-Month Price Performance
Image Source: Zacks Investment Research
Will the bull run continue for HOOD stock? It is essential to delve into the details and analyze various factors.
Factors Supporting Robinhood
Diversifying Business: Robinhood became extremely popular among younger generations riding on the meme stock wave in early 2021. Yet, since its IPO in July 2021, a lot has happened on the company front.
Robinhood has evolved from a brokerage firm mainly trading in digital assets to a more mature and diversified entity as it expanded into retirement and credit card accounts. Looking at the numbers, in 2021, HOOD majorly depended on transaction-based revenues (almost 75% of total revenues) to generate income. In 2023, this came down to 42% of total revenues.
In July 2024, Robinhood acquired Pluto Capital Inc., an innovative artificial intelligence-powered investment research platform. This marked a significant step as the company aims to enhance its offerings with intelligent, data-driven investing tools. With the integration of Pluto’s advanced capabilities, the company is set to revolutionize the investment experience for its users.
This is part of HOOD’s broader strategy to expand its global and domestic footprint and become a comprehensive financial services provider. In sync with this, the company announced plans to acquire Bitstamp, the global cryptocurrency exchange, for approximately $200 million in June 2024. The move underscores the company's commitment to diversifying its product offerings beyond traditional transaction-related revenues.
With this impending acquisition, Robinhood positions itself to compete directly with major crypto exchanges like Binance and Coinbase Global, Inc. (COIN - Free Report) . Bitstamp's core spot exchange, which features more than 85 tradable assets, coupled with its popularity in Europe and Asia, will significantly enhance Robinhood’s crypto offerings.
Revenue Expectations: The company also launched its trading app in the U.K. this March. HOOD is contemplating offering cryptocurrency futures in the United States and Europe soon.
Further, it plans to launch Chicago Mercantile Exchange CME (Chicago Mercantile Exchange)-based futures in the United States for Bitcoin and Ether. Since the approval of U.S. Bitcoin exchange-traded funds (ETFs) in January, the demand for futures has risen. Robinhood intends to capitalize on this to diversify revenues.
Initiatives to change the revenue mix give HOOD solid leverage.
Sales Estimates
Image Source: Zacks Investment Research
HOOD Rewards Shareholders: In May, Robinhood announced a share buyback plan. The company’s board of directors approved a share repurchase program, authorizing it to buy back up to $1 billion of its outstanding common stock.
While the plan doesn’t have an expiration date, the company expects to buy back shares in two to three years, starting from the third quarter of 2024.
Robinhood is on solid ground, with ample cash reserves. As of June 30, 2024, it reported cash and cash equivalents of $4.5 billion.
Robinhood Faces Regulatory Issues
Robinhood's push into the global crypto market comes amid ongoing regulatory challenges in the United States. Earlier this month, the company agreed to pay $3.9 million as a settlement with the California Department of Justice over crypto withdrawals. It was alleged that the company prevented its customers from withdrawing cryptocurrency from their accounts between 2018 and 2022.
Additionally, in May 2024, the company received a Wells notice from the U.S. Securities and Exchange Commission (“SEC”) concerning the tokens traded on its platform, reflecting the complex regulatory landscape for crypto firms.
The notice came because of the alleged violation of registrations as a securities broker and transfer agent.
Likewise, the SEC filed a lawsuit against Coinbase in June 2023 on the allegations of operating an unregistered exchange by allowing the sale of certain crypto tokens the agency considers as investment securities and, hence, part of the SEC’s jurisdiction.
HOOD Stock has More Upside Left
Analysts seem bullish about Robinhood’s prospects. Over the past two months, the Zacks Consensus Estimate for 2024 and 2025 earnings has moved upward.
Estimate Revision Trend
Image Source: Zacks Investment Research
This upward adjustment reflects a positive sentiment among analysts and suggests encouraging prospects.
Despite the massive rally, HOOD stock is still undervalued. Currently, the stock is trading at 3.13X 12-month trailing price/tangible book (P/TB), below the industry’s P/TB TTM multiple of 5.09X. Also, the stock is trading well below SCHW, which is trading at 7.98X 12-month trailing P/TB TTM.
Price-to-Tangible Book Ratio (TTM)
Image Source: Zacks Investment Research
Hence, from a valuation perspective, Robinhood shares present an attractive buying opportunity as the market is yet to fully recognize or price the company’s growth prospects.
A thorough analysis shows that Robinhood is on the right path to expand/diversify operations. With the stock market rally likely to continue because of several favorable macroeconomic developments, the company will keep benefiting from the rising trading volume despite lower interest rates.
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. The company is well-poised to ride the growth trajectory.
The positive sentiments of analysts are echoed in the upward estimate revision trends and compelling valuation. All these factors indicate that betting on this Zacks Rank #1 (Strong Buy) stock now will be a wise investment move. You can see the complete list of today’s Zacks #1 Rank stocks here.