Can Robinhood Markets Stock Be Buy Now?

Robinhood Markets (NASDAQ: HOOD) has staged an impressive comeback, with its shares rising approximately 230% to $40 per share over the past year. Founded just 11 years ago, this online brokerage transformed the financial landscape by introducing commission-free trading of stocks, ETFs and options, forcing traditional players to adapt.

However, its journey in the public markets has not been easy. After debuting in 2021 at $38 per share, the stock fell to a one-year record low of $6.81, reflecting doubts about its staying power. With the recent rise in its stock price, the question now is whether Robinhood stock can be bought, sold, or held.

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Robinhood is back in growth mode

After the pandemic boom, Robinhood’s 2022 revenue of $1.36 billion fell 25% compared to 2021. Given Robinhood’s stock growth narrative, investors fled to the exits, fearing the worst. .

However, the brokerage has proven resilient, generating $1.94 billion in revenue until the first three quarters of 2024, representing a year-on-year increase of 39%. Digging into the details of the recovery, the company generates the majority of its revenue through trading volume among its 11 million monthly active users, whether options, cryptocurrencies or stocks.

Through the first three quarters of 2024, Robinhood’s transaction-based revenue, driven primarily by options tradingreached 975 million dollars, which is equivalent to a year-on-year growth of 35%.

The brokerage then generated $813 million in net interest income, which is the interest generated on clients’ cash sweep and margin balances minus the interest rate given to users. Notably, the company reported net deposits of $34 billion for the first three quarters of 2024, an increase of 172% year over year.

Finally, Robinhood Gold, the company’s subscription offering, costs $5 a month or $50 a year and offers users benefits such as higher returns on uninvested brokerage cash. This segment boosted its “other income” segment by 29% year over year, equal to $149 million.

Robinhood is profitable and is buying back its shares

Robinhood’s recent revenue growth has propelled it to consistent profitability, achieving four consecutive quarters of net income. During the first three quarters of 2024, the company reported $495 million in net incomea significant change from the net loss of $571 million recorded during the same period in 2023.

In addition to its new profitability, Robinhood has $3.7 billion in net cash, which likely gave management the confidence to allocate capital to a new share buyback strategy. In July 2024, Robinhood initiated a $1 billion share buyback program and spent $97 million to buy back 5 million shares in the third quarter of 2024.

During the latest earnings call, CFO Jason Warnick explained the rationale behind this capital allocation: “We love deploying capital like this. It reduces our share count and positions us to grow EPS and free cash flow by action over time.

However, the actual impact of these buybacks remains uncertain. A key challenge lies in Robinhood’s high profile stock-based compensationfor a total of $871 million in 2023. More recently, in the third quarter of 2024, while the company repurchased $97 million in shares, it also issued $79 million in stock-based compensation, resulting in only $18 million in net share buybacks.

Since going public, Robinhood’s share count has risen 5.8%, with only a marginal 0.1% decline since the buyback program was introduced in July. Going forward, shareholders should monitor whether management can significantly reduce the share count or whether buybacks simply offset the dilution caused by stock-based compensation.

HOOD shares outstanding data for Y Charts

Robinhood is a cyclical business and relies on incentives

In addition to challenges with stock-based compensation, Robinhood’s revenue is more cyclical than that of traditional brokerages. A significant portion of Robinhood’s revenue depends on trading activity, especially in options and cryptocurrencies. This fluctuation in trading activity manifested itself in 2023, when Robinhood’s transaction-based revenue fell 4% compared to 2022.

Robinhood has also relied heavily on incentives to attract and retain users, such as a $200 bonus for signing up for Robinhood Gold, as well as account transfer and retirement incentives. This approach significantly increased its incentive spending, reaching a total of $202 million during the first three quarters of 2024, a staggering 1,920% increase from $20 million year over year.

While this strategy has paid off to some extent (monthly active users increased 7% year over year to 11 million, and Robinhood Gold subscribers increased 65% to 2.2 million), it comes at a cost. To sustain growth or maintain its current user base, Robinhood may need to continue offering costly incentives, which could erode its profitability.

Can Robinhood be bought, sold or held in 2025?

Robinhood has transformed the trading landscape, empowering retail investors and forcing traditional brokerages to adapt. While the company price-earnings ratio of 69.2 is significantly higher than the competition Carlos Schwab At 28.5 years old, Robinhood’s strong growth potential and popularity among younger investors, with an average user age of just 34, make it an intriguing opportunity. For long-term investors focused on innovation and market disruption, Robinhood is worth adding to your portfolio in 2025.

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Charles Schwab is an advertising partner at Motley Fool Money. Collin Brantmeyer has no position in any of the stocks mentioned. The Motley Fool recommends Charles Schwab and recommends the following options: Short $80 calls in March 2025 on Charles Schwab. The Motley Fool has a disclosure policy.