In Quiver’s recent institutional holdings data, we have seen many hedge funds and asset managers increasing their stake in Robinhood (NASDAQ:HOOD). Firms such as ARK Investment Management, Cinctive Capital Management, and Dimensional Fund Advisors have all added to their HOOD positions recently. Most notably, Dimensional Fund Advisors increased shares held by around 20% (as filed on 03/31), bringing their total HOOD holdings to 2,759,846 shares worth nearly $36 million dollars at current market prices. With this in mind, we took a closer look at some of the reasons why many investors may be bullish on Robinhood.

In May, Robinhood announced that it would allow users to engage in the 24-hour trading of select ETFs (Exchange Traded Funds) and US-listed equities. This announcement makes Robinhood the first brokerage to offer 24-hour trading on individual stocks, showing Robinhood’s commitment to providing innovative and flexible trading options that cater to its customer base.

Robinhood Markets Inc. (NASDAQ:HOOD) is an American financial services company. Founded in 2013 and headquartered in Palo Alto, California, Robinhood’s mission is to democratize finance for all, making investing simple for newcomers and experienced investors alike via an intuitive and easy to understand user interface. A pioneer of commission-free stock trading, Robinhood makes it easy for investors of all income levels and backgrounds to start investing.

Robinhood largely caters to new investors, and this is evident by their education platform and resources. Robinhood offers various educational resources and products (Robinhood Learn, In-App Education, Newsfeeds, Robinhood Snacks, and Crypto Earn and Learn) that allow users to easily digest market news and learn about the fundamentals of the stock market. Additionally, through Robinhood’s Crypto Earn and Learn program, users are able to receive rewards (paid out in cryptocurrencies) after completing courses that cover the basics of cryptocurrency markets. With Millenials and Gen Z becoming an ever-increasing force in investing and financial markets, Robinhood offers itself as a beginner friendly option for new investors and traders. By offering an easy to understand UI (compared to more traditional brokerages like Charles Schwab, TD Ameritrade, and Fidelity) and an array of markets that are more popular amongst younger investors, Robinhood does a great job appealing to this growing base of new investors.

Robinhood offers a suite of different products that allow users to gain exposure to different investment instruments, products, and markets. Robinhood’s main product is its brokerage business, which offers commission free investing into US-listed stocks and exchange traded funds (ETFS), options trading and advanced options strategies, fractional shares trading, recurring investments, margin trading, stock lending, cash sweep, IPO access and directed share programs, and instant withdrawal. In addition to the brokerage business, Robinhood offers Robinhood Crypto, the company’s commission free cryptocurrency trading arm, along with Robinhood Wallet, a cryptocurrency wallet that allows users to deposit and withdraw cryptocurrencies to and from Robinhood with no network fees.

On top of this, Robinhood offers products like Robinhood Gold, a monthly subscription service that gives subscribers access to premium features like Nasdaq Level II Market Data, Morningstar equity research reports, higher interest on cash sweeps, and more. With the addition of 24-hour trading on select stocks, Robinhood is developing a strong moat for itself within the brokerage space. While the brokerage / financial services space is highly competitive, we believe Robinhood sets itself apart from the competition with its wide range of products that give it a strong switching costs moat. Although this moat can weaken over time as more traditional brokerages start to offer more products to compete with Robinhood (cryptocurrency offerings will be a product to watch over the next few years), we believe that this moat is very strong. Offering commission-free ETF, US stock, and cryptocurrency trading, along with products such as Robinhood Gold, Robinhood Wallet, and their vast educational resources, new investors will learn and grow with the brokerage, making it very hard to switch. While switching brokerages is definitely a common thing, it can be quite a pain, especially if you are used to a brokerage’s UI and have large amounts of money in a brokerage. It can take weeks to properly switch brokerages and have everything be cleared, a huge psychological and time-based cost.

With ARPU (Average Revenue Per User) increasing 45% year over year (from $53 dollars per user to $77 dollars per user), we can see the relative strength of this moat. The ARPU data adds credence to the point that new investors learn and grow with the platform, causing users to become more engaged with the platform and all of its product offerings, further solidifying the switching costs moat. As users become more comfortable and engaged with the platform, they will find it increasingly hard (from a psychological costs standpoint) to make the switch to another brokerage.

Looking at Robinhood’s income statement, we can see some stellar revenue growth. Since 2019, Robinhood has grown its total revenues at a CAGR of nearly 53%. Additionally, Robinhood sports one of the healthiest balance sheets you could ask for from a high-growth, mid-cap tech stock. Robinhood has no long-term debt, and has around $5.46 billion dollars worth of cash and equivalents on hand. With net debt of nearly $-7.77 billion dollars (this figure is negative as Robinhood has no long-term debt and a significant cash balance that acts as an excess cash position), we can see that Robinhood is in a very solid financial health position.

Looking at valuation, Robinhood seems to be valued quite conservatively on a book value per share basis. Robinhood currently trades at a book value per share of $7.83, and with current market prices trading around $12.50, the market is pricing market value per share at $4.67 dollars per share, or $4.2 billion dollars. This $4.2 billion dollar excess valuation is the additional value shareholders place on top of a company’s book value that represents future earnings prospects, growth potential, and intangible assets like brand value.

Many bulls believe that Robinhood is unfairly beaten down by the market (despite its strong recent performance) and we have identified two main reasons for this. First and foremost, Robinhood’s brand image was severely impacted by the Gamestop fiasco in early 2021. When Gamestop had a massive rally due to a short squeeze, Robinhood had to disable the buy button on GME shares. This caused massive outrage within the WallStreetBets community on Reddit and the general retail investing community. A class action lawsuit was filed on behalf of investors claiming that Robinhood colluled with Citadel Securities to stop investors from buying meme stocks in early 2021, however, that case was dismissed. This event strongly hurt Robinhood’s brand image as an advocate for retail investors, however in the two years that have passed since then, it is becoming increasingly evident that this negative sentiment is wearing off.

We also believe that Robinhood has been beaten down by the market because of tapering brokerage commissions over the last year or so. Brokerage commissions make up around 54% of Robinhood’s revenue, and due to bearish market sentiment and the 2022 bear market, they have slided. Brokerages often see a decrease in trading volume during a bear market, and we believe that Robinhood exacerbates this issue as they largely cater to new, young investors, a subset of investors that may be more risk-averse during a bear market, leading to even lower trading volume compared to other brokerages. While this temporarily decreased revenues in 2022, we believe that if the post-Covid economy improves and macroeconomic data settles, we will see a resurgence in trading volume on Robinhood in tandem with a bull market. 

A major growth catalyst for Robinhood is international expansion. 100% of Robinhood’s revenue comes from the United States, and they are looking to expand internationally to change that. Their first foray into international expansion was via Robinhood Wallet, and they are looking to offer brokerage services in the United Kingdom by the end of the year. While international expansion is based on a lot of different factors, a successful expansion overseas could lead to a massive increase in earnings, tapping into new markets and customer bases, and diversifying revenue streams beyond the United States.

Keep an eye out for HOOD stock’s latest news, data, and more with Quiver Quantitative.