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1 Cryptocurrency Stocks Rise 30% in 2024 and Could Keep Going Higher
Robinhood’s latest earnings report offered several positive insights.
I’ve been very critical of Robinhood Markets (HOOD 4.07%) over the past two years, which wasn’t necessarily controversial given that its stock has suffered a peak-to-trough drop of 91% from its all-time high. The online brokerage platform was constantly losing active users and, as a result, its transaction revenues seemed to be in perpetual decline.
However, Robinhood’s fortunes have changed in 2024. A rising stock market has brought users back into the fold and they are actively trading, which is driving up the company’s revenue.
The fastest-growing part of Robinhood’s business right now, however, is the cryptocurrency segment, where revenue more than tripled year-over-year during the latest first quarter of 2024 (ended March 31). Robinhood stock is up 30% so far in 2024, but here’s why it could be set to rise.
Robinhood’s most important metric increased
Robinhood’s monthly active users (MAU) peaked at 21.3 million during the second quarter of 2021. They have declined in nearly every quarter since then, bottoming out at 10.3 million near the end of 2023. It was the main reason why I was bearish on the company’s prospects. Simply put, generating sustainable revenue growth will be extremely difficult if the number of users to be monetized continues to shrink.
However, Robinhood’s MAU has increased from that low point and the metric currently stands at 13.7 million. At the end of the first quarter, the company also had a record 23.9 million total funded customer accounts, and the value of assets held within them increased 65% year over year to $130 billion.
The latter figure was helped by the rise in shares and cryptocurrency prices. The major US stock market indexes have reached record highs in 2024, as have the major cryptocurrencies Bitcoin.
Robinhood customers also deposited $11.2 billion in new funds during the quarter. The platform earns commissions through a practice called payment for order flow, which involves forwarding customer orders to third parties market creators for fulfillment. Submitting a $10,000 stock or cryptocurrency order earns Robinhood a higher commission than a $5,000 order, so its assets in custody are a very important indicator of its earning potential.
Robinhood’s revenue soared during the first quarter
Robinhood generated record revenue of $618 million during the first quarter, 40% more than the same period a year earlier. But the real story is beneath the surface of the headline number.
Transaction revenue increased 59% to $329 million, which is important because it is earned through the company’s brokerage operations. There was a positive contribution from all asset classes (stocks, options and cryptocurrencies), but cryptocurrencies had the best performance, with revenues increasing by 232%:
Image source: Robinhood Markets.
This was a positive change from 2023, when Robinhood’s total revenue was mostly driven higher by interest income. The company has $4.7 billion in cash and cash equivalents balancePlus it holds $4.5 billion on behalf of clients, so the rapid rise in interest rates over the past two years has increased the amount it was earning storing that money in banks.
Robinhood also earns interest on its credit card and margin lending businesses. Overall, the company generated $254 million in total interest revenue during the first quarter, up 22% year-over-year. This number could shrink over the next year if the US Federal Reserve cuts interest rates as expected, which makes Robinhood’s trading revenue recovery even more important.
Finally, Robinhood continues to build on its earnings progress. The company’s operating costs fell 52% during the first quarter, and because revenues grew so quickly, that led to $157 million in GAAP (generally accepted accounting principles) net profit: a huge swing from the net loss of $511 million in the same period a year ago.
Much of the decline in operating costs is attributable to the cancellation of Robinhood’s founders’ reward, which granted stock to the company’s founding team. This led to a $536 million reduction in stock compensation expense during the first quarter.
Why Robinhood stock could go up from here
To Robinhood’s credit, it was not deterred by the collapse in its stock price after 2021. The company has continued to innovate and expand its product portfolio, and those initiatives are starting to pay off.
For example, it introduced a pension offering in January 2023 and already has more than 650,000 customers on board. During the first quarter, Robinhood’s assets under custody for its retirement segment topped $4 billion, a 14-fold increase from its launch a year earlier. Many of Robinhood’s customers are young, novice investors, so it could generate a powerful long-term revenue stream if it can convince them to stick around for their decade-long journey to retirement.
Robinhood is currently valued at nearly $15 billion. Based on trailing 12-month revenues of $2 billion, its shares are trading at price/sales ratio (P/S). of approximately 7.6. This is substantially lower than its peak, set in 2021, because the company’s revenues have grown along with the decline in the share price:
PS CAPPA report data of YCharts
I previously argued that Robinhood’s shrinking user base and stagnant revenue warranted a low P/S ratio. However, now that profits have returned to growth – driven by a significant acceleration in transaction revenues – it makes sense for the stock’s P/S ratio to rise.
Therefore, there may be additional benefits for Robinhood investors.