Robinhood: Green Shoots Are Here (NASDAQ:HOOD)

Volatility has returned in full power within the tech sector, and as typical Robinhood (NASDAQ:HOOD) bears the brunt of concern and warning overtaking the markets. The tech-oriented brokerage has seen a whiplash of a yr, pushed by 2022’s cryptocurrency crash and bursting rates of interest placing dents throughout all asset values.

Regardless of buyers’ hesitation to stake their confidence in Robinhood, I feel there are many drivers for a rebound on this inventory. Up solely ~10% yr to this point (however nonetheless down greater than 80% from post-IPO highs), buyers could be sensible to revisit the bull case for Robinhood in the long term:

The important thing storyline for Robinhood, in fact, is that it’s the foremost brokerage gaining market share amongst youthful buyers. As millennials and Gen Z enter their prime incomes years, Robinhood will proceed to profit from wealth accretion and continued deposit development.

Right here is my full long-term bull thesis for Robinhood:

• Robinhood is dominating within the millennial/Gen Z demographics that may quickly overtake the majority of worldwide wealth. Conventional brokerages are nonetheless catching as much as Robinhood’s reputation. Market cycles have at all times occurred and can proceed to happen; there can be intervals of frenzied buying and selling and there can be intervals of calm. However over the arc of time, Robinhood’s share of market exercise will develop.
• Product innovation by no means stops. A part of what makes Robinhood so interesting is that it is usually first-to-market (or at the very least, first to popularize) many new key options. Crypto buying and selling, money advances, and quick access to low-cost margin had been a few of Robinhood’s key defining benefits. Retirement accounts will assist to draw a good wider pool of belongings to Robinhood.
• Diversified income streams. When rates of interest had been low and money was low cost, Robinhood benefited from buoyant market exercise. However now, as rates of interest have shot up and put a chill over buying and selling volumes, Robinhood is benefiting from increased curiosity spreads. Put in different phrases, Robinhood has now navigated by means of recessionary cycle and has confirmed itself able to sustaining.
• Profitability in thoughts: When buying and selling volumes had been excessive in 2021, Robinhood generated constructive adjusted EBITDA each quarter. Amid the present buying and selling crunch, the corporate is making focused structural changes to its workforce to allow it to take care of profitability going ahead. Whereas the down cycle within the markets will not final perpetually, the belt-tightening and operational self-discipline that Robinhood is exercising now will definitely maintain.

Proper now, Robinhood is experiencing large volatility due to macro market headwinds. A complete technology of buyers who traded very actively through the pandemic are experiencing their first downturn, and buying and selling volumes are down in consequence. Crypto, as soon as Robinhood’s most profitable phase, can be underneath hearth from increased rates of interest, regardless of earlier pondering that crypto is an asset with very low correlation to mainstream market components.

The most effective method right here is to disregard all of the cyclical macro components and to deal with the extra everlasting drivers to Robinhood’s enterprise: deposit development and enhancements in profitability. And on the latter entrance, observe as properly that although Robinhood focuses on adjusted profitability measures that exclude inventory comp, Robinhood’s founders additionally gave up practically $500 million of inventory awards within the close to time period – which ought to result in decrease stock-based comp and dilution:

All in all, there are a number of causes to purchase Robinhood whereas the inventory stays low. I stay bullish on the title and am retaining it in my portfolio till it crosses at the very least the mid-teens.

This fall obtain

Let’s now talk about Robinhood’s newest This fall ends in better element.

The primary constructive spotlight to name out: in This fall, the corporate achieved $4.8 billion in net-new deposits, up 30% y/y – the strongest development price since Q2 of 2021.

The corporate is benefiting from two components right here. First, it is gaining traction from its IRA merchandise, which it launched in December. The corporate has not but reported what number of retirement accounts it has opened, however complete web cumulative funded accounts grew by 50k to finish This fall at 2.3 million, a document for the corporate. Secondly, increased rates of interest (Robinhood is providing 4.15% curiosity for its Gold prospects) are encouraging Robinhood purchasers to brush money out of low-interest financial institution accounts and different brokerages and shift them to Robinhood. (Private disclaimer right here: I’m a Robinhood buyer and I’ve accomplished simply that, concentrating my uninvested money in Robinhood for the sake of its unbeatable rate of interest).

In fact, Robinhood continues to be affected by decrease total belongings underneath custody (-37% y/y to $62 billion), pushed completely by market valuations. Transactional income can be down -30% y/y, harm by decrease crypto and choices exercise (at one level as proven within the chart under, crypto generated greater than $200 million of income in 1 / 4, versus the brand new crypto run price of $40-$50 million in quarterly income):

The offset right here, nonetheless, is curiosity revenue, helped partially by net-new deposits and better money balances (money is $8 billion of Robinhood’s web $62 billion of belongings underneath custody, and that money portion is up 242% y/y). As proven within the chart under, web curiosity income grew by an astounding 165% y/y:

Put collectively, Robinhood’s income in This fall of $380 million grew 5% y/y and 5% sequentially, with the 165% y/y development in web curiosity revenue offsetting -30% y/y declines in transactional income.

Income stability additionally mixed properly with value controls. The corporate achieved $82 million in adjusted EBITDA in This fall, representing a 22% margin. It is essential to notice that the corporate’s excessive watermark for income was Q2’21 (coinciding with the height of crypto buying and selling exercise), and in that quarter the corporate had solely delivered $90 million of adjusted EBITDA at a 16% margin. Translation: Robinhood is turning into leaner and extra worthwhile over time.

CFO Jason Warnick even commented on the This fall earnings name that Robinhood has a possible path to GAAP profitability by the second half of 2023, pushed partially by the founders’ determination to forego inventory awards this yr:

Trying ahead to 2023, we’re planning to enhance our prices by one other 7% on common as we plan to maintain our value lean, whereas investing for future development. Our outlook for 2023 OpEx previous to SBC is a spread of $1.42 billion to $1.48 billion. I’d observe that on a quarterly foundation, this outlook is about the identical because the This fall 2022 vary we offered final quarter, as I feel it is a good zone to function our enterprise this yr.

Turning to SBC, it was $160 million in This fall, which brings our full yr complete to $654 million. Trying forward, Vlad and Baiju’s determination to cancel their 2021 pre-IPO market-based awards considerably lowers our outlook for the again half of this yr. Below accounting guidelines, we are going to document a Q1 non-cash cost of about $485 million for the total acceleration of the canceled awards. We additionally count on SBC this yr, excluding the cost can be in a spread of $470 million to $550 million, which is a 22% enchancment on common from final yr.

Together with the cost, our full yr 2023 SBC outlook is a spread of $955 million to $1.035 billion. For Q1, we count on SBC of $615 million to $645 million principally from the accounting cost. Given our progress on prices over the previous yr and improved SBC outlook, we now count on to get a lot nearer to constructive GAAP web revenue within the again half of this yr. Past that, we predict it’s a little bit early to foretell a selected timeline for reaching GAAP profitability as our revenues fluctuate with the market backdrop. That stated, we’re targeted on getting there by conserving our prices lean and scrappy to drive working leverage as our enterprise grows, whereas staying versatile to take a position for the long-term.”

Key takeaways

Robinhood has at all times been delicate to market volatility, however buyers who’ve a long-term mindset and may abdomen short-term fluctuations ought to take the chance to purchase into the inventory now. Long term, Robinhood continues to draw deposits and develop alongside its youthful investor base, whereas additionally strengthening its profitability by means of the effectivity initiatives it kicked off final yr. Keep lengthy right here.