Robinhood stocks: From Brat to Big Boy - How to Trade It

Robinhood (HOOD) is no longer just a platform for speculative trading. The company has reported extraordinary growth, making trading and investing appealing to younger people. Here’s how to approach trading Robinhood stock, considering its evolution and future prospects.

 

• Impressive Growth Metrics:

  • Total net revenue in the fourth quarter rose 115% year-over-year to $1.01 billion.
  • Transaction-based revenue increased by over 200% to $672 million, driven by cryptocurrency trading revenue (up over 700%), options revenue (up 83%), and equities revenue (up 144%).
  • Net income was $916 million, more than 10 times the year-ago period.
  • The platform now has 25.2 million clients, up 8% year-over-year.

• Maturing Business Model: Robinhood's management is acting more like seasoned financial industry executives, dispelling previous concerns about a lack of gravitas. The platform has kept pace with surging client demand and hasn’t crashed, which is a considerable accomplishment.

• Focus on Stability: Management is focused on making less speculative financial products, like retirement accounts, more appealing to the customer base. Robinhood Gold, a membership program offering advanced market analytics, a 3% match on retirement account contributions, and higher interest rates for cash deposits, is a key metric for evaluating the company’s stability. At the end of the fourth quarter, Gold membership was at 2.6 million. Program enhancements and investor education could further increase memberships and enhance earnings.

• Valuation: Robinhood stock is up approximately 38% this year and 256% over the past 12 months. It trades around 33 times trailing earnings, higher than the S&P 500 index’s 28, but potentially justified by the company’s recent earnings growth.

• Trading Strategy: To capitalize on Robinhood’s potential, consider a May options trade to capture first-quarter earnings:

  • Sell a May $45 put option for about $3.30.
  • Use the proceeds to buy the May $55 call option and sell the May $75 call.
  • This cash-secured put sale positions investors to buy stock on a pullback.
  • The call spread enables investors to participate in an advance. If the stock is at $75, the spread is worth a maximum profit of $20.

• Risks: The risk is that Robinhood’s stock falls far below the strike price if the next earnings report disappoints.

 

Investment Recommendation

Given Robinhood's extraordinary growth, management's execution, and focus on stability, it may be a mistake to anticipate a sharp stock decline. Consider the options trade to capture first-quarter earnings, but be aware of the risks involved.