New Products Like Index Options And Futures Trading Will Drive Future Success

Key Takeaways

• International expansion and focusing on active traders can drive higher revenue growth by increasing market share and customer engagement.
  
• New product introductions and Robinhood Gold adoption boost revenue potential and improve financial metrics like net margins and earnings.
  
• Regulatory changes, managing credit risk, and ineffective promotional offers pose significant challenges to Robinhood's revenue, margins, and future growth.

Catalysts

Operates financial services platform in the United States.

• Robinhood's strategy to expand internationally and focus on winning the active trader market could lead to higher revenue growth as they increase their footprint and capture more market share.
  
• The successful rollout and increasing adoption of Robinhood Gold, especially the Gold Card, can boost recurring revenue and increase wallet share, potentially improving net margins through higher customer retention and lifetime value.
  
• The introduction of new products like index options and futures trading signifies a doubling of Robinhood's addressable market on web and mobile, which could drive significant revenue growth and improve earnings over time.
  
• Continuous technological advancements, such as the launch of Robinhood Legend for active traders, are expected to increase trading volume and user engagement, positively impacting transaction-based revenues.
  
• Share repurchase programs, as well as managing operating expenses carefully, are likely to enhance EPS and free cash flow per share, contributing positively to earnings growth.

Robinhood Markets Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Robinhood Markets's revenue will grow by 19.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.8% today to 27.7% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $1.23) by about January 2028, up from $525.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.3 billion in earnings, and the most bearish expecting $603.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 46.7x on those 2028 earnings, down from 68.3x today. This future PE is greater than the current PE for the US Capital Markets industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 1.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.21%, as per the Simply Wall St company report.

Robinhood Markets Future Earnings Per Share Growth

Risks

• Regulatory changes present a risk, particularly if evolving legal requirements negatively affect the company's operations, impacting revenue and earnings.
  
• The potential for credit risk in the rollout of the Gold Card, if not managed carefully, could lead to financial losses that would impact net margins.
  
• Decreased effectiveness of promotional offers, like the 1% gold deposit boost not driving expected customer activity, poses a risk to future revenue growth.
  
• Rate cuts may reduce the attractiveness of Robinhood Gold subscriptions, which could decrease revenue derived from interest-related products.
  
• Increased costs associated with new product launches, such as futures and index options, may affect expense ratios and net earnings if they don't generate expected volumes.

Valuation

• The analysts have a consensus price target of $46.53 for Robinhood Markets based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $60.0, and the most bearish reporting a price target of just $25.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.1 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 46.7x, assuming you use a discount rate of 7.2%.
• Given the current share price of $40.56, the analyst's price target of $46.53 is 12.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.