Robinhood Markets(NASDAQ: KAP)the online brokerage that popularized commission-free trading went public in July 2021 at $38 per share. The stock reached an all-time high of $70.29 less than a week later, but fell below $7 the following June.
Shares of Robinhood tumbled as rising interest rates curbed market interest in the risky stocks, options and cryptocurrencies that have driven most of the growth during the pandemic. However, the shares recovered over the next two years as interest rates spiked and investors poured more money back into the platform.
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Robinhood’s stock is trading at around $36 at the time of writing, which represents a five-bag gain from all-time lows but still below its IPO price. Let’s take a fresh look at the business and see where the stock could go over the next three years.
Robinhood’s growth accelerated during the pandemic as social media buzz, stimulus checks and fear of missing out (FOMO) brought a rush of investors to the commission-free trading platform. That buying frenzy, which lasted through most of 2020 and 2021, drove many meme stocks to all-time highs. Robinhood went public at the height of that buying frenzy.
But in 2022, funded customer growth came to a near standstill, monthly active users (MAUs) plummeted, and assets under custody (AUC) shrank as it attracted fewer net deposits during the market downturn. That decline can largely be attributed to rising interest rates, which cooled the market and pushed investors toward more conservative investments. But activity stabilized in the broader market in 2023 and 2024 as investors focused on future rate cuts.
MAUs remain below pandemic-era peaks, but annualized average revenue per user (ARPU) increased 31% year over year to $105 in Q3 2024. That’s only slightly lower than the peak APRU of $115 in the second quarter. of 2020.
That growth was fueled by the market recovery and the expansion of the subscription-based gold plan, which offers higher interest rates on uninvested cash, bonuses on taxable deposits and IRA contributions, larger direct deposits, lower margins and access to trading data of level II. and other benefits. The number of Gold subscribers increased 65% year over year to 2.2 million in the third quarter of 2024.
Robinhood also became profitable under generally accepted accounting principles (GAAP) in the first nine months of 2024 as it cut costs and reined in stock-based compensation. Earlier this year, the company even launched a $1 billion buyback plan.
Robinhood still faces stiff competition from traditional brokers such as Charles Schwab (NYSE: SCHW) And Morgan Stanley‘S (NYSE: MS) E*Trade, which has focused on commission-free stock trading in recent years. It also still generated 80% of its trading revenue from riskier options and crypto trades rather than stocks in the last quarter, and that mix could worsen volatility during a market downturn.
Still, Robinhood’s growth in funded customers remains steady, it is signing more of its active users to its Gold plans, and increasing the tenacity of its ecosystem with more cash management and digital payment services. It’s also connecting more users to its Robinhood Cash Card, a revolving debit card MasterCard‘S (NYSE:MA) payment network and offers cashback rewards on automatic investments.
If the Fed continues to cut rates, investors will likely pour more money into Robinhood and place more trades. However, the Federal Reserve recently predicted that it would make fewer rate cuts in 2025 unless inflation finally cools. That pressure could cool the market again and slow Robinhood’s growth over the next three years.
Analysts expect Robinhood’s revenue to grow at a compound annual growth rate (CAGR) of 22% between 2023 and 2026. In short, they expect the company to remain profitable in 2024 and grow its net income at a CAGR of 8% over the next two years.
These growth rates appear stable but may disappoint investors who had hoped for an acceleration to pandemic-era levels. At 42 times next year’s earnings, the share is also not a bargain. Assuming it matches Wall Street estimates, earnings per share continues to grow at an 8% CAGR between 2026 and 2028, and still trades at 40 times forward earnings, the stock could potentially grow by could increase by almost 20%.
That’s a decent gain over three years, but it may not be worth the risk in the short term. Investors can likely make similar gains with more conservative stocks, and Robinhood’s stock could easily be halved again if the market crashes and crushes valuations.
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Charles Schwab is an advertising partner of Motley Fool Money. Leo Sun has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Mastercard. The Motley Fool recommends Charles Schwab and recommends the following options: January 2025 long calls of $370 on Mastercard, short December 2024 calls of $67.50 on Charles Schwab, and short January 2025 calls of $380 on Mastercard . The Motley Fool has a disclosure policy.
Where Will Robinhood Markets Stock Be in Three Years? was originally published by The Motley Fool
