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$Robinhood(HOOD)$

Robinhood’s Sensitivity to Market Trends

Robinhood is a company highly sensitive to macroeconomic trends. When markets are thriving, the platform experiences strong growth—investors are optimistic, depositing extra funds, taking more risks, and trading more frequently, all of which benefit Robinhood. However, the reverse is also true. Recently, as market sentiment has declined, stock prices—especially in the cryptocurrency sector—have dropped, and Robinhood’s stock has reacted more sharply than the broader market.

Is Robinhood a Buying Opportunity?

This raises the question: Is Robinhood a buying opportunity for long-term investors? In this video, I’ll analyze the company's revenue growth over the past several years, cash flow, returns on investor capital, and valuation metrics, including forward price-to-earnings and price-to-free-cash-flow ratios, to assess whether the current stock price presents an attractive risk-reward profile.

Robinhood’s Volatile 2025 Performance

If you've been following Robinhood's stock, you’ve likely noticed its extreme volatility in 2025. The stock surged nearly 75% early in the year before retreating and is now down over 4.3% year-to-date. Despite this turbulence, the company’s trailing 12-month revenue has grown significantly, reaching $2.95 billion—up from around $800 million in 2021 and more than double its 2022 levels.

Market Conditions and Robinhood’s Exposure

Looking back, late 2022 saw a major stock market decline as central banks, particularly the U.S. Federal Reserve, raised interest rates to combat inflation, leading to a sharp selloff in tech stocks and cryptocurrencies. Investors now anticipate a similar trend for Robinhood, given current market conditions. As of March 10, 2025, the NASDAQ Composite Index is down over 4%, Bitcoin has dropped below $80,000, and other cryptocurrencies have suffered even steeper declines. This "risk-off" sentiment—where investors become more cautious and move away from speculative assets—could spell trouble for Robinhood in the coming quarters.

Signs of Growth in Recent Updates

That said, the company’s most recent update on February 12th highlighted strong growth. The number of Gold subscribers surged 86% to 2.6 million, a record high. Net deposits climbed to $16.1 billion, marking a 42% increase from the prior quarter. Transaction-based revenues skyrocketed over 200% to $672 million, with cryptocurrency trading revenues jumping more than 700% to $358 million. This surge was fueled by market enthusiasm, particularly around the U.S. election and renewed interest in high-risk investments.

Over 50% of Robinhood Customers Are First-Time Investors

This statistic could be the strongest case for Robinhood as a democratizing force in investing. If more than half of its users are new to investing, the platform should be recognized for making the world of finance more accessible. Supporting this view, the average account size is around $3,500. When compared to E*Trade’s average of $100,000 or Charles Schwab’s $240,000, it becomes clear that Robinhood is engaging individuals who might not have traditionally participated in the stock market.

The Reality Behind the Numbers

However, a closer look reveals some drawbacks to this narrative. The median account size is only $240, suggesting that many users have smaller investments. Moreover, Robinhood customers are significantly more active than those at other brokerages. In the first quarter of 2021, Robinhood users made 60% more trades on average than Schwab customers, and this gap widens when accounting for differences in account sizes. This heightened activity is financially beneficial to Robinhood, which earns substantial revenue from those trades. In fact, 81% of the company’s revenue in Q1 came from selling orders—a practice known as payment for order flow (PFOF).

The Financial Impact of PFOF and Riskier Trading

While nearly all online brokerages engage in PFOF, Robinhood generates nearly 100 times more revenue per dollar of customer account value than Schwab, according to an Alphacution Research Conservatory report. This disparity has implications for less experienced investors. For one, Robinhood’s users tend to trade riskier financial products like options contracts and cryptocurrencies. The same report highlights that Robinhood’s customers trade nearly 90 times as many options contracts per dollar in their account compared to Schwab customers. Furthermore, Robinhood’s reliance on cryptocurrency—while competitors like Schwab, E*Trade, and TD Ameritrade don’t even offer it—drives up the value of its trades because market makers value these orders more than simple stock trades.

Potential Pitfalls for Inexperienced Investors

Inexperienced investors might be more vulnerable to exploitation during periods of market volatility, a concern for Robinhood’s business model. Additionally, the high trading activity may generate revenue for Robinhood because users are trading more often. The company employs gamification techniques—similar to how slot machines keep players engaged—to drive user engagement and encourage frequent transactions. Just like the one-armed bandit, those who participate in this cycle often find themselves losing over time.

Can Robinhood Sustain Its Momentum?

The key question for investors now is whether Robinhood can sustain this momentum or if it remains too vulnerable to shifting market conditions.

Investor Concerns Over Robinhood’s Future

Investors are now worried that much of Robinhood’s recent gains have been erased and that the stock is heading in the wrong direction. Adding to these concerns, President Donald Trump recently stated, “I’m not watching the stock market,” which some investors interpret as a signal that prices could drop further—potentially bad news for Robinhood. This situation is reminiscent of 2022 when the company’s revenue declined from nearly $1.8 billion to $1 billion. However, Robinhood rebounded from that downturn, significantly increasing its revenue since then.

Cash Flow Volatility and Risks Ahead

That said, the company’s cash flow from operations has been volatile on a trailing 12-month basis, showing no consistent upward trend. When Robinhood performs well, its cash flow surges, at times generating figures between $1.2 billion and $2 billion. However, during a challenging period at the end of 2022, it posted a negative $2 billion. While the company has generally managed cash flow effectively, investors worry that another downturn—marked by reduced user engagement, fewer deposits, and declining cryptocurrency interest—could lead to another extended period of negative cash flow. A slowdown in activity could bring Robinhood’s performance back to levels seen during the last broad market decline in late 2022 when risk assets—including crypto, tech stocks, and momentum stocks—fell sharply.

Robinhood’s Progress and Recovery

Despite these concerns, Robinhood has made significant progress. Its return on investor capital now stands at 11.11%, a major improvement from -60% in 2022. This demonstrates the company's ability to recover from downturns and emerge stronger, a crucial factor for long-term investors. Market declines are typically temporary, and history shows that stocks tend to recover over time. Given that Robinhood has already weathered a market slump and improved its financial performance, investors have reason to be optimistic about its ability to navigate the current downturn.

Is Robinhood Undervalued?

Following its recent price drop, Robinhood now trades at a price-to-earnings ratio of 20 and a price-to-free-cash-flow ratio of about 16. These valuations appear attractive considering the company’s growth potential. While I’m not a fan of how management handled certain situations—particularly the meme stock frenzy and the platform’s gamification of investing—the stock, at its current valuation, looks compelling.

Conclusion

So, is Robinhood a buy, hold, or sell? Based on its financial recovery, long-term prospects, and current valuation, I rate Robinhood stock as a Hold.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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