Expanding Globally And Innovating In Crypto And AI Powers Future Revenue Surge

Key Takeaways

• Robinhood's focus on the active trader market and international expansion promises future revenue growth from equities, options, and new markets.
  
• Investments in product development, customer experience, and strategic acquisitions, like Bitstamp, aim to diversify and enhance product offerings, boosting revenues.
  
• Exposure to cryptocurrency volatility, regulatory uncertainties, international expansion risks, intense market competition, and third-party service dependencies pose significant operational and financial risks.

Catalysts

Operates financial services platform in the United States.

• Robinhood is focused on winning the active trader market, which is expected to increase its share among equities and options traders, positively impacting transaction-based revenue.
  
• The introduction of industry-leading margin rates for active traders and improvements in the account transfers flow have led to a significant increase in margin balances, contributing to higher net interest revenues.
  
• Expansion internationally, having already shown strong outcomes and several financial records, points towards future revenue growth from new markets outside of the U.S.
  
• Investing in product development and customer experience, including the roll-out of Robinhood Gold with enhanced features, aims at increasing wallet share with their customers, which is likely to boost subscription and service revenues.
  
• Strategic acquisitions, such as Bitstamp for accelerating the crypto roadmap, alongside organic growth investments in areas like AI and advisory services, are geared towards diversifying and enhancing the product offerings, leading to potential increases in both transaction-based and net interest revenues.

Assumptions

• Analysts are assuming Robinhood Markets's revenue will grow by 11.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 13.0% today to 0.2% in 3 years time.
• Analysts expect earnings to reach $723.7 million (and earnings per share of $0.71) by about August 2027, up from $290.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $931.6 million in earnings, and the most bearish expecting $408.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.0x on those 2027 earnings, down from 60.5x today. This future PE is greater than the current PE for the US Capital Markets industry at 19.7x.
• Analysts expect the number of shares outstanding to decline by 2.93% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.85%, as per the Simply Wall St company report.

Risks

• There is potential risk from volatility in the cryptocurrency market, which can significantly impact monthly active users and related revenue streams.
  
• Regulatory developments and uncertainty, particularly in the cryptocurrency space, could hinder the ability to innovate and expand product offerings, affecting growth and revenue potential.
  
• The success of expanding internationally is uncertain and presents execution risk, which could impact future revenue and growth expectations.
  
• Intense competition in both the active trader market and broader financial services could pressure growth and profitability.
  
• Dependence on third-party services for product offerings, such as the issue with the third-party ATS leading to an outage, poses operational risks that could impact customer satisfaction and revenue.

Valuation

• The analysts have a consensus price target of $23.53 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 $32.0, and the most bearish reporting a price target of just $17.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.1 billion, earnings will come to $723.7 million, and it would be trading on a PE ratio of 33.0x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $19.83, the analyst's price target of $23.53 is 15.7% 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.