Stock of the week - Robinhood Markets (27.03.2025)

Robinhood Markets Inc. (HOOD.US) shares are in the spotlight following Wednesday's product event as the company unveiled an ambitious expansion into wealth management, banking, and AI-powered investing tools. This strategic evolution marks Robinhood's determined effort to transform from a meme stock-associated trading app into a comprehensive financial services platform capable of challenging established industry giants like Fidelity and Charles Schwab.

Strategic Expansion Beyond Trading: Robinhood's latest announcements represent its most significant step toward becoming a full-service financial platform, introducing three major new offerings: Robinhood Strategies (wealth management), Robinhood Banking, and Robinhood Cortex (AI investment tool). CEO Vlad Tenev framed this expansion as part of the company's mission to "give you a world-class financial team in your pocket, with cutting-edge tools you can't find elsewhere," positioning Robinhood to capture more wallet share from its predominantly young, tech-savvy customer base.

Democratizing Wealth Management: Robinhood Strategies aims to disrupt the traditional wealth management industry with a 0.25% annual fee capped at $250 for Gold subscribers. This approach creates a particularly attractive value proposition for accounts over $100,000, with effective fees dropping to just 0.1% for $250,000 portfolios and 0.05% for $500,000 portfolios. According to Steph Guild, President of Robinhood Asset Management and former JP Morgan executive, the service targets a gap in the current landscape between expensive human advisors and basic robo-advisors, offering actively managed portfolios that can include both ETFs and individual stocks with a minimum investment of just $50.

Robinhood Wealth Management. Source: Company announcement

Banking Services with Premium Experience: Launching this fall, Robinhood Banking promises a "private banking-like experience" for Gold members, offering approximately 4% APY on savings accounts, FDIC insurance through Coastal Community Bank, and unusual perks like same-day cash delivery and access to exclusive events such as the Met Gala and Oscars. Deepak Rao, VP and GM of Robinhood Money, emphasized that these premium services are designed for the mass market, not just the wealthy.

Robinhood Banking. Source: Company announcement

AI-Powered Investment Tools: Complementing these services, Robinhood Cortex will provide real-time market analysis, price signals, technical data, and news insights. Abhishek Fatehpuria, senior director of brokerage product, described it as putting "an AI-powered research assistant in your pocket," helping investors understand market movements and simplify trading strategies. This tool will begin rolling out to Gold members later this year, further enhancing the value proposition of Robinhood's premium subscription.

Robinhood Cortex. Source: Company announcement

Prediction Markets Drive Growth: These announcements follow Robinhood's recent launch of a prediction markets hub, allowing users to wager on outcomes of events like Federal Reserve policy meetings and NCAA tournaments. Morgan Stanley analyst Michael Cyprys estimates this feature alone could generate $260 million in annual revenue, potentially adding 20 cents to EPS or 14% to 2025 earnings, assuming it matches the success of Robinhood's presidential election contracts that saw over 500 million contracts traded in about a week.

Challenges & Risks: Despite the promising trajectory, Robinhood faces significant headwinds. The company derives nearly 38% of its revenue from interest income, making it vulnerable to anticipated Federal Reserve rate cuts. Market analysts project at least two 25-basis-point cuts by the end of 2026, potentially reducing interest revenue. Additionally, Robinhood's performance remains cyclical, tied to market euphoria and trading volumes that could deteriorate in an economic downturn. The company's increasing exposure to cryptocurrency markets, particularly Bitcoin, introduces another volatility factor as some analysts predict a potential Bitcoin bear market in the next 10-12 months.

Valuation

The analysis aims to estimate Robinhood's market value by comparing it to similar companies in the brokerage and financial services industry, focusing on key valuation multiples: Price-to-Earnings (P/E), Price-to-Sales (P/S), and Price-to-Book (P/B). The process involved selecting comparable companies, gathering financial metrics, calculating averages, and applying these to Robinhood's figures, with considerations for growth rates and market perceptions.

Selection of Comparable Companies

To ensure a fair comparison, companies were chosen based on their operations in the capital markets industry, particularly those offering brokerage services. The selected peers include:

• Charles Schwab (SCHW)

• Interactive Brokers (IBKR)

• SoFi Technologies (SOFI)

• Raymond James Financial (RJF)

• LPL Financial (LPLA)

Below is a table summarizing the multiples for Robinhood and each comparable company, based on data from early 2025:

Calculation of Average Multiples

To estimate Robinhood's valuation, average multiples were calculated for the comparable companies. Given potential outliers, both mean and median were considered, but the mean was used for initial calculations to reflect the overall industry level. The averages are as follows:

• Average P/E: 24.74

• Average P/S: 3.89

• Average P/B: 4.29

These averages were then applied to Robinhood's financial metrics to derive implied valuations. However, given SoFi's broader fintech focus, a sensitivity analysis excluding SoFi was also performed, yielding:

• Average P/E (excluding SoFi): 22.55

• Average P/S (excluding SoFi): 3.48

Implied market capitalizations are:

• P/E Valuation: $34.17 billion.

• P/S Valuation: $11.47 billion.

• P/B Valuation: $29.68 billion.

When excluding SoFi, the valuations adjust to:

• P/E Valuation: $31.15 billion.

• P/S Valuation: $10.27 billion.

• P/B Valuation: $33.35 billion.

In conclusion, based on a valuation of $32.25 billion, the estimated share value for Robinhood is approximately $42.00 per share, with a range of $40.56 to $43.43 depending on the specific multiple used.

Robinhood Markets (D1 Interval)

The stock is trading below the 38.2% Fibonacci retracement level. Bears will aim to retest the 100-day SMA, targeting the 61.8% Fibonacci retracement level, which has served as a strong support zone. Bulls need to break above the 200-day SMA, with strong resistance at the 23.6% Fibonacci retracement level. The RSI is in bullish divergence with higher highs, while the MACD is starting to tighten after a bullish crossover.