Up 300% in 1 Year, Is It Too Late to Buy This Stock?

Key Points

• Robinhood has performed exceptionally well over the past few years.

• However, the stock's high valuation might be an issue for some investors.

• Despite this potential challenge, Robinhood has excellent long-term prospects.

• 10 stocks we like better than Robinhood Markets ›

The meme stock fad that swept through Wall Street a few years ago was powered in part by trading activity on Robinhood Markets (NASDAQ: HOOD), which offers investment and financial services through its online platform.

The stock may have raised doubts among long-term investors at the time, but its outlook has since improved. Over the past few years, Robinhood has undergone a significant transformation, and we are now seeing the results of this progress. The company's shares are up by a whopping 312% over the trailing 12-month period.

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Some might wonder whether it's still worth it to invest in Robinhood after this incredible run. Let's look deeper into the business and determine whether there is still some upside left for the company.

Image source: Getty Images.

What's going on with Robinhood?

Robinhood is helping move Wall Street onto Main Street. The company's user-friendly app, commission-free trading, fractional share offerings, and much more make investing far simpler and more appealing to the average person. Robinhood has been especially popular among younger people, and although it gained fame for its role in the meme stock phenomenon, it would be a mistake to reduce it to a trading platform.

Robinhood is a full-fledged financial services company that offers wealth management services, a debit card, a savings account of sorts (with competitive interest on uninvested cash), and retirement accounts, among other features. In many ways, it competes directly with larger banks, but on the kind of interactive platform we are used to in this digital age.

Although there are companies that offer a similar package of services, Robinhood helped pioneer features such as commission-free trading and became popular partly because of it. That's a first-mover advantage that has likely created brand recognition and appeal for first-time investors looking for a user-friendly platform. Thanks to all that, Robinhood is attracting more members and more assets, leading to improved financial results.

Over the past three years, the company's revenue has soared, and it has finally turned profitable.

HOOD Revenue (Quarterly) data by YCharts.

Robinhood had 27 million investment accounts as of the end of the first quarter, up 11% year over year. The company's average revenue per user in Q1 came in at $145, up 39% compared to the year-ago period. Many other key metrics, from net deposits to assets under custody, continue to move in the right direction. In other words, all is going exceptionally well for Robinhood. But is now a good time to buy the stock?

The long-term view

Robinhood's success over the past few years -- and particularly over the trailing 12-month period -- has had at least one potential drawback for interested investors. The stock now appears prohibitively expensive. Robinhood's forward price-to-earnings (P/E) tops 67, significantly higher than the 17.1 average for financial stocks. Some might argue that the company's P/E isn't particularly meaningful since it hasn't been profitable for long. But even Robinhood's forward price-to-sales multiple is extremely high at 22.8 -- the undervalued range starts at "2."

While profitable growth stocks naturally command a premium, the company will almost certainly experience some volatility -- and might decline significantly -- if it fails to live up to the market's predictions. Even with this caveat in mind, though, my view is that Robinhood is an excellent stock to buy and hold for at least the next five years.

The company has several growth opportunities. One is to continue upgrading its platform by offering more services and giving its clients more options and flexibility. That's what Robinhood has done for a long time, and it is still at it. It recently launched wealth management and private banking services for Gold members on its platforms.

Getting more paid subscribers for its Gold subscription services is another excellent way it can improve its financial results. Not only does it lead to a consistent, predictable stream of revenue, but Gold members have access to more features on the platform and generally spend more than non-paying subscribers.

Another important long-term growth avenue for Robinhood is international expansion. The company had over 150,000 customers in the European Union and the U.K. as of the end of the first quarter. That's a small percentage of its U.S. client population, but all this means is that Robinhood is still in the early innings of its efforts in these regions.

If Robinhood can reproduce its success abroad -- and I believe it can -- the future looks incredibly bright for the company. For all these reasons, Robinhood's shares remain attractive for investors who are willing to hold on to them for a long time.

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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.