Where Will Robinhood Stock Be in 1 Year?

Robinhood Markets (NASDAQ: HOOD) has been explosive during the past three years, leveraging its online trading platform to capitalize on a strong bull market. It's expanding its business in all sorts of directions, giving it room to run in many ways. While some of those directions lean toward traditional finance, others are similar to the riskier types of products Robinhood is known for. Given these multiple growth avenues, let's see where Robinhood might be in a year from now.

The platform of choice for many investors

Robinhood gained renown for its free stock-trading platform that set a new standard for brokerages. Retail investors flocked to the site when it first debuted, and it continues to onboard new customers at a healthy pace. Funded customers increased 10% year over year to 26.8 million in the third quarter.

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It also has a paid membership program called Robinhood Gold that costs $50 annually. Some of the perks of the program include matching retirement fund contributions, cash back on credit card purchases, and a high yield on uninvested funds. This program has been growing quickly, with 1.7 million new additions in the third quarter, a 77% year-over-year increase.

Where Robinhood is a year from now may largely depend on how the market is doing. In a trend that plays out repeatedly over time, a strong bull market generates enthusiasm and high trading activity. If this continues, Robinhood is likely to keep adding new customers and converting them into paying clients. However, if the market goes sour, customer growth is likely to slow or disappear.

Free investing for all

Robinhood makes money in a number of ways, including the membership program, but its core trading activity generates revenue through a payment for order flow model, in which it sends trade orders to market makers. Transaction revenue was $730 million in the third quarter, up 129% from last year.

These days, most of its trading activity and transaction revenue aren't coming from equities trading, which accounted for only $86 million of third-quarter transaction revenue. The company continues to offer new cryptocurrencies on the platform, and cryptocurrency trading revenue increased 300% in the quarter to $268 million. This high dependence on cryptocurrency trading has powered Robinhood stock during the past few months, and the stock movement has correlated with the rise and fall of Bitcoin and other high-profile cryptocurrencies. If these cryptocurrencies continue to increase in value during the next year, Robinhood stock is likely to reflect that, but the alternative is also true, and Robinhood stock could tumble if Bitcoin falls.

At the same time, Robinhood is branching out into other products and services, and these could protect the business if they take off. For example, it's rolling out credit cards and checking accounts, traditional financial services that let it compete with established financial giants. Although Robinhood's consumer base is fairly small right now for a financial company, if it can persuade more of its customers to open these kinds of accounts, that will provide it with more stability in case there is some kind of market crash or other market turbulence.

A premium price for high growth

Robinhood stock trades at a price-to-earnings (P/E) ratio of 56, which is a premium valuation. There's some growth built into that price, which means that Robinhood has to sustain current growth rates to maintain it.

Total revenue increased 100% in the third quarter year over year, which is why it can carry a high valuation today. If that slows during the next year, though, the price may fall. While the market continues to rise -- it's up almost 17% year to date, Robinhood should continue to enjoy increasing sales and profit. Robinhood stock is crushing the market, up 268% this year. To keep up that kind of momentum during the next year, Robinhood will need to crank out phenomenal results.

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.