Summary Robinhood's transformation into a financial super-app is accelerating, with new products attracting diverse users and boosting engagement. Deposit growth is robust, driven by innovative offerings like Robinhood Gold and expansion into international markets such as the UK. Profitability is surging, with strong adjusted EBITDA, free cash flow, and a Rule of 40 score above 100, reflecting operational excellence. While I'm wary of Robinhood's expanding valuation multiples, I maintain a buy rating, confident in Robinhood's resilience and long-term growth amid market volatility. Even though geopolitical tensions are rising and the likelihood of a recession in the U.S. is significant, investors seem to be unwilling to send the stock market lower, though the stock market has experienced some volatile swings over the past few weeks near YTD highs. Benefiting tremendously from this volatility is Robinhood ( HOOD ), the digital brokerage that is taking more and more steps to become a fully-fledged digital bank and an all-in-one financial super-app. Investors have cheered Robinhood's ascent this year, sending the stock up ~2x. The question for investors is: does the Robinhood rally have further steam to go? Data by YCharts I last wrote a buy opinion on Robinhood in March, when the stock was still trading ~$40 per share, as investors were getting nervous on the company's transactional growth amid market declines. Since then, Robinhood has surged 2x: and though I am increasingly nervous on the company's valuation, it's also becoming more difficult not to see the case for Robinhood's tremendous expansion as it expands its product flywheel, continues to attract a load of deposits, and enjoys huge growth in trading volumes. I remain at a buy rating here. To me, these are the core reasons to be bullish on Robinhood: Robinhood's vision of becoming a financial super-app and drawing in different types of users is becoming more crystallized. Over the past few years, Robinhood has added a slew of new products: retirement accounts, credit cards, checking and savings accounts, managed investment funds, and even event-based contracts where users can bet on sporting outcomes (I recently tested this feature myself during the French Open). The company has also released Robinhood Legend this year, in a bid to win more sophisticated traders to its platform and win market share from the likes of Interactive Brokers. Fierce deposit growth. Robinhood's broadening appeal is readily demonstrated in its continued expansion in deposits. It's also convincing a larger share of customers to sign up for its $5/month Robinhood Gold program, offering higher interest rates on invested cash and access to the 3% rewards Robinhood Gold credit card. International expansion. The company just recently made big inroads into the UK, its first major international market with an eye toward rolling out in more countries. Incredibly profitable. Robinhood has scaled to a point of generating significant adjusted EBITDA and free cash flow. The company has a Rule of 40 score (which it calculates based on adjusted EBITDA margins plus revenue growth) of over 100, indicating an unrivaled ability to skyrocket revenue while improving margins. While I encourage active trading during extreme market volatility, Robinhood is one stock that I'm holding long term in my portfolio: its ability to navigate through both bullish and bearish market conditions makes me confident in the stock's continued expansion. Q1 download Let's now go through Robinhood's latest quarterly results in greater detail. The Q1 revenue trends are shown below: Robinhood revenue trends (Robinhood Q1 earnings deck) Robinhood's revenue surged 50% y/y to $927 million, beating Wall Street's expectations of $917 million (+48% y/y). While net interest revenue growth slowed down driven by compressing interest rates, the company benefited from buoyant market activity in Q1, with transactional revenue grew 77% y/y to $583 million. The chart below, meanwhile, showcases the breakdown of Robinhood's trading revenue streams. Particularly notable is the heightened interest in crypto trading since last year's election: crypto trading revenue grew 2x y/y to $252 million. Though Robinhood is known primarily for stock trading, it's actually crypto that now generates the largest revenue for the company (traders beware: this is because Robinhood's bid-ask spreads on crypto are quite high). That being said, options and stock trading didn't lag behind either, growing 56% y/y and 44% y/y, respectively (though do note that revenue from stock trading is quite a small ~6% slice of Robinhood's total revenue). Robinhood transactional revenue growth (Robinhood Q1 earnings deck) As a reminder, Robinhood publishes its trading volume data each month: and we like what we see post the close of Q1. The chart below showcases that in May, equity trading volumes still surged 108% y/y, options grew 36% y/y, and crypto was up 65% y/y. Robinhood May trading activity (Robinhood May metrics release) On crypto specifically, we think the recent passage of the so-called "Genius Act" that sets the first regulatory framework for stablecoins is a very positive catalyst for crypto wallets, including Robinhood and Coinbase ( COIN ) that will encourage more adoption of stablecoins, especially USDC. Note that Robinhood currently doesn't pay U.S. investors any rewards on their USDC holdings, meaning that Robinhood itself will benefit from the interest on users' cash deposits when they buy USDC. Furthermore, through May, Robinhood also continued to attract a wealth of new deposits. Quarter-to-date deposits in Q2 (for the months of April and May) stacked up to $10.3 billion, growing 21% y/y - clearly, sharp market volatility in April didn't cause a deluge of customers to exit the markets. We note as well that Robinhood's own market book soared 100% y/y to $9.0 billion, an increasingly important source of net interest income for the company. Robinhood deposits (Robinhood May metrics release) Alongside fierce deposits growth and healthy trading activity, we note as well that Robinhood's adjusted EBITDA nearly doubled y/y to $470 million, representing a best-in-class 51% adjusted EBITDA margin that improved 11 points y/y. Robinhood adjusted EBITDA (Robinhood Q1 earnings deck) Risks, valuation and key takeaways All of this being said, it's also critical for long-term investors to be cognizant of the risks that Robinhood faces. To me, these are the core items that we should monitor: Over-reliance on crypto trading revenue. As crypto becomes more established (especially through recent stablecoin regulation), adoption may certainly increase - but trading frequency and volatility may wane. We are cautious about Robinhood generating ~50% of its current revenue from crypto trading, which may not be a sustainable source of growth. Net interest income will get squeezed. Interest on deposits and margin loans generates roughly the same amount of revenue as equity and options trading combined. As rates fall, we should be prepared for Robinhood's overall top line revenue growth to decelerate, with pressure on net interest margins. The biggest risk of all, to me, is Robinhood's valuation. As shown in the chart below, Robinhood's valuation multiples have soared this year, and now sit at ~38x forward adjusted EBITDA and ~19x forward revenue. Data by YCharts This being said, it's hard to lean on near-term multiples for a company that is growing revenue at a ~50% y/y clip and nearly doubling its adjusted EBITDA. I continue to have tremendous confidence in Robinhood's ability to expand its addressable market through adding a more robust banking platform as well as managed investment services to help diversify its revenue streams away from crypto. Stay long here and keep riding the recent momentum higher.
