Robinhood Markets: Strong Q2 Earnings, A Long-Term Buy

Aug. 20, 2021 6:53 AM ETRobinhood Markets, Inc. (HOOD)85 Comments

Summary

  • Robinhood delivered strong revenue growth in Q2 and it continues to be both accounting profitable and cash generative.
  • Short term concerns regarding guidance and revenue concentration on specific securities are reasonable worries.
  • Looking long term however, we continue to view this company as a deflationary force in securities trading, able to grow its market by attracting new customer bases.
  • We remain at long-term Buy as a result.  We expect no let-up in the volatility of the stock.  Long-term investors might consider buying the stock stepwise on weakness.
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The Genie Isn't Going Back In The Bottle

The main innovation achieved by Robinhood (NASDAQ:HOOD) is, in our view, its ability to attract new customers to an old industry. The company is geared to win newcomers to investing and trading and everything about its business, from its simple app and website, modern user interface and focus on accounts with relatively small balances, reinforces this. We don't doubt that over time HOOD will wish to upsell this customer base to some premium version of the service nor indeed that they will try to attract new, experienced clients to any such premium version. But for now the focus is on new-to-securities-trading individuals. That means that HOOD is growing its market and that it stands to win the lion's share of the new market segment.

Whether this new user base is trading options, equities, cryptocurrencies, or something else, is less important in our view. We believe the new cohort will continue to see trading as an important part of their lives, not least because in a world where pay inflation and the savings rate is meager, capital gains become more important in order to develop wealth.

Here's the latest numbers - the gaps are a result of this newly-traded stock having gaps in its reported SEC record, as do all such companies at this stage. As time goes by you will see us complete the additional quarters' numbers following each successive 10-Q or 10-K being filed.

Source: Company SEC filings, YCharts.com, Cestrian Analysis

Revenue growth slowed in Q2 vs. Q1 but it remains exceptional, at 131% growth vs. the same quarter a year ago. Similarly whilst EBITDA dropped a touch from last quarter, it remains low-double-digit positive margin. Unlevered pre-tax free cashflow continues to be prodigious and capital expenditures light. (Note, in the table above, we have averaged out the capex and change in net working capital across Q1 and Q2 of 2021 and also across Q1 and Q2 of 2020, since that's all the company has disclosed so far - as time goes on we hope to be able to break these down into specific quarters).

Valuation remains reasonable in our view; 22.5x TTM revenue for a company growing revenues at >100% per year is not at all elevated in the current environment.

Source: Company SEC filings, Seeking Alpha, YCharts.com

Consistent with the experience of most new listings early in their lives, HOOD stock has sold off following its initial post-listing peak. The stock currently sits at the 0.786 Fibonacci retracement level from its post-IPO runup. It's possible that the stock finds support here (if it does that would suggest we may soon enter a Wave 3 run up) but plenty of stocks fall below their IPO price before going on to beat it. So if you plan on scaling into this name you might consider doing so piecemeal, step by step, not trying to call the bottom or the top of any given cycle, since to do so is very difficult indeed.

Source: TradingView, Cestrian Analysis

To our mind, if you share our view that HOOD is an innovator in its industry, a cost-leader able to attract new customers into an old-line world, then you might consider adding to your holdings during these sell-off periods.

We remain at Buy on a long term basis and hold the stock in staff personal accounts accordingly.

Cestrian Capital Research, Inc - 19 August 2021.

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Disclosure: I/we have a beneficial long position in the shares of HOOD either through stock ownership, options, or other derivatives. Business relationship disclosure: See disclaimer text at the top of this article.

Additional disclosure: Cestrian Capital Research, Inc staff personal accounts hold long positions in HOOD.

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