Is Robinhood Markets Stock a Buy Now?

Robinhood Markets (NASDAQ: HOOD) has staged an impressive comeback, with its stock soaring approximately 230% to $40 per share over the past year. Founded just 11 years ago, this online brokerage reshaped the financial landscape by introducing commission-free trading for stocks, ETFs, and options, forcing traditional players to adapt.

However, its journey in the public markets has been anything but smooth. After debuting in 2021 at $38 per share, the stock tumbled to an all-time low of $6.81 within a year, reflecting doubts about its staying power. With the recent surge in its share price, the question now is whether Robinhood stock is a buy, sell, or hold.

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Robinhood is back in growth mode

After its pandemic boom, Robinhood's 2022 revenue of $1.36 billion fell by 25% compared to 2021. Considering Robinhood's growth stock narrative, investors fled for the exits, fearing the worst.

However, the brokerage has proved resilient, generating $1.94 billion in revenue through the first three quarters of 2024, representing a 39% year-over-year increase. Digging into the turnaround details, the company generates most of its revenue through transaction volume among its 11 million monthly active users, whether it is options, cryptocurrencies, or equities.

Through the first three quarters of 2024, Robinhood's transaction-based revenue, driven primarily by options trading, reached $975 million, equating to a year-over-year growth of 35%.

Next, the brokerage generated $813 million in net interest revenue, which is the interest generated on customers' cash sweep and margin balances less the interest rate given to users. Notably, the company reported net deposits of $34 billion through the first three quarters of 2024, an increase of 172% year over year.

Finally, Robinhood Gold, the company's subscription offering, costs $5 per month or $50 annually and offers users benefits like higher yields on uninvested brokerage cash. This segment drove its "other revenues" segment by 29% year over year, equating to $149 million.

Robinhood is profitable and is buying back its shares

Robinhood's recent revenue growth has propelled it into consistent profitability, achieving four consecutive quarters of net income. For the first three quarters of 2024, the company reported $495 million in net income, a significant turnaround from the $571 million net loss recorded through the same period in 2023.

In addition to its newfound profitability, Robinhood has $3.7 billion in net cash, which likely gave management the confidence to allocate capital to a new share repurchasing strategy. In July 2024, Robinhood initiated a $1 billion share buyback program, spending $97 million to repurchase 5 million shares in Q3 2024.

During the latest earnings call, CFO Jason Warnick explained the rationale behind this capital allocation: "We love deploying capital like this. It lowers our share count and positions us to increase EPS and free cash flow per share over time."

However, the actual impact of these repurchases remains uncertain. A key challenge lies in Robinhood's high stock-based compensation, totaling $871 million in 2023. More recently, in Q3 2024, while the company repurchased $97 million in shares, it also issued $79 million worth of stock-based compensation, resulting in just $18 million in net share repurchases.

Since its IPO, Robinhood's share count has risen by 5.8%, with only a marginal 0.1% decline since introducing the buyback program in July. Moving forward, shareholders should monitor whether management can reduce the share count meaningfully or if buybacks merely offset the dilution caused by stock-based compensation.

HOOD Shares Outstanding data by YCharts

Robinhood is a cyclical business and relies on incentives

In addition to challenges with stock-based compensation, Robinhood's revenue is more cyclical than that of traditional brokerages. A significant portion of Robinhood's revenue depends on trading activity, especially in options and cryptocurrency. This fluctuation in trading activity showed up in 2023 when Robinhood's transaction-based revenue dropped by 4% compared to 2022.

Robinhood has also heavily depended on incentives to attract and retain users, such as a $200 bonus for signing up for Robinhood Gold, as well as account transfer and retirement match incentives. This approach significantly increased its incentive spending, totaling $202 million through the first three quarters of 2024 -- a staggering 1,920% increase from $20 million year over year.

While this strategy has paid off to some extent -- monthly active users rose 7% year over year to 11 million, and Robinhood Gold subscribers surged 65% to 2.2 million -- it comes at a cost. To sustain growth or maintain its current user base, Robinhood may need to continue offering costly incentives, which could erode its profitability.

Is Robinhood a buy, sell, or hold in 2025?

Robinhood has transformed the trading landscape, empowering retail investors and forcing traditional brokerages to adapt. While the company's price-to-earnings ratio of 69.2 is significantly higher than competitor Charles Schwab at 28.5, Robinhood's strong growth potential and popularity among younger investors, with a median user age of just 34, make it an intriguing opportunity. For long-term investors who focus on innovation and market disruption, Robinhood is worth adding to your portfolio in 2025.

Should you invest $1,000 in Robinhood Markets right now?

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Charles Schwab is an advertising partner of Motley Fool Money. Collin Brantmeyer has no position in any of the stocks mentioned. The Motley Fool recommends Charles Schwab and recommends the following options: short March 2025 $80 calls on Charles Schwab. The Motley Fool has a disclosure policy.