Where Will Robinhood Be in 1 Year?

Key Points

• Robinhood's sales and earnings are rising fast.

• Average revenue per user surged 34% in Q2 as investors flocked to the trading app.

• But Robinhood's momentum is likely dependent on a booming stock market.

• 10 stocks we like better than Robinhood Markets ›

Many years after Robinhood (NASDAQ: HOOD) launched its popular app for buying and selling stocks, many investors are still trying to figure out whether the stock is a good investment or a borderline meme stock. To be clear, Robinhood has a viable business that's attracting new customers, its revenue is rising, and it has positive earnings.

That should be enough to shed the meme stock association it developed years ago. And yet, Robinhood's success is still closely tied to the rapid rise of equity markets. Robinhood's shares have gained almost 400% during the past year alone, adding to some investors' skepticism that it's a flash in the pan that could soon fizzle.

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So, where does Robinhood go from here? Here's what's happening with the company right now and what investors should keep their eye on during the next year.

Image source: Getty Images.

Robinhood's platform is booming

By almost all measures, Robinhood is thriving. The company's Q2 results beat Wall Street estimates, with sales rising 45% to $989 million and its non-GAAP (adjusted and not meeting generally accepted accounting principles) earnings doubling to $0.42 per share.

The growth was partially driven by an increase in Robinhood's customers, with funded customer accounts increasing by 10% to 26.5 million. Customers appear to love Robinhood's platform, and that's helped fuel transaction-based revenue growth of 65% in the quarter to $539 million.

Adding to its success in Q2 was the fact that average revenue per user (ARPU) rose 34% year over year to $151, and the amount of Robinhood Gold subscribers -- a premium service that includes a high-interest savings account, detailed stock reports, and other perks -- spiked 76% to 3.5 million.

On top of all this growth, Robinhood continues to expand its services, including a recent rollout of its Robinhood Legend service to all U.K. customers and new cryptocurrency services through its recent acquisition of the crypto exchange Bitstamp.

What investors should keep an eye on over the next year

Robinhood is clearly on a strong growth trajectory right now, but I think there are a couple of things investors should be wary about. The first is that Robinhood's rapid share price rise during the past few years means the stock is now trading at a premium. Robinhood shares have a price-to-earnings (P/E) ratio of 55, compared to the average P/E of about 30 for the S&P 500.

Some investors are fine with frothy valuations, but when a stock gains almost 400% in just one year, there's little room for error. If one or two bad quarters come along, and they do for every company, Robinhood's shares could see a significant pullback.

Equally as important is the fact that Robinhood's recent business success is directly tied to a booming stock market. The S&P 500 is up about 50% during the past three years, and AI stocks Nvidia and Palantir have soared 900% and 1,800%, respectively, over that period. It's probably no surprise that both companies are two of the top 10 stocks held by Robinhood investors.

It follows, then, that if there's a significant slowdown in the market, perhaps because of an economic slump, the average investor may be less inclined to open up their Robinhood app and buy stocks. Of note, the U.S. economy added just 73,000 new jobs in July, and job numbers for the previous two months were recently drastically revised downward. That's not great news for the economy.

All of this means that while Robinhood is growing fast, I think investors should be cautious about buying the stock right now. With its rich premium and its dependence on a high volume of trading, its shares could face a setback if a bumpy economy is around the corner.

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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.