1 Cryptocurrency Stock Up 30% in 2024 That Could Keep Soaring

I’ve been very critical of Robinhood Markets (NASDAQ: HOOD) over the last few years; This was hardly controversial, considering its shares had suffered a 91% peak-to-trough collapse from their all-time high. The online brokerage platform was constantly losing active users, and as a result, trading revenue seemed to be constantly declining.

But Robinhood’s fortunes changed in 2024. The rising stock market has brought users back and they are actively trading, which increases the company’s revenue.

The fastest-growing part of Robinhood’s business right now is its cryptocurrency segment, where revenue more than tripled year over year in the recent first quarter of 2024 (ended March 31). Robinhood shares are up 30% so far in 2024, but here’s why they may be poised to rise even further.

Robinhood’s most important metric rose

Robinhood’s monthly active users (MAU) reached 21.3 million in the second quarter of 2021. It has declined nearly every quarter since then, falling to 10.3 million by the end of 2023. This was the main reason why I was optimistic about the company’s prospects. Simply put, if the number of users to monetize continues to decline, it will be extremely difficult to achieve sustainable revenue growth.

However, Robinhood’s MAU has risen since that low point, and the metric currently stands at 13.7 million. The company also had a record 23.9 million total funded customer accounts at the end of the first quarter, and the value of assets held in those accounts rose 65% year over year to $130 billion.

The latter figure was helped by rising stock and cryptocurrency prices. Each of the major US stock indexes has hit record highs in 2024, and so has the leading cryptocurrency, Bitcoin.

Robinhood’s customers also deposited $11.2 billion in new funds in the quarter. The platform earns fees through a practice called payment for order flow, which involves passing customer orders to third-party market makers for fulfillment. Sending a $10,000 stock or cryptocurrency order earns Robinhood a higher fee compared to a $5,000 order; Therefore, their assets in trust are a very important indicator of their income-generating potential.

Robinhood’s revenue increased in the first quarter

Robinhood generated record revenue of $618 million in the first quarter; This is 40% more than in the previous year period. But the real story is hidden beneath the headline number.

Transaction revenue increased 59% to $329 million; This is important because this is earned from the company’s brokerage operations. There was a positive contribution from all asset classes (equity, options and crypto), but crypto was the standout performer, with revenue increasing by 232%:

The story continues

Image source: Robinhood Markets.

This was a welcome change from 2023, when Robinhood’s total revenue increased mostly due to interest income. The company has $4.7 billion in cash and equivalents on its balance sheet, plus another $4.5 billion it holds on behalf of its customers, so the rapid rise in interest rates over the last few years has increased the amount it makes by stashing that money in banks.

Robinhood also earns interest from its credit card product and margin lending activities. Overall, the company generated $254 million in total interest income in the first quarter, up 22% year over year. That figure could decline next year if the Federal Reserve lowers interest rates as expected, making the revival in Robinhood’s trading revenue even more significant.

Finally, Robinhood continues to build on its bottom line progress. The company’s operating costs fell 52% in the first quarter, resulting in $157 million in GAAP (generally accepted accounting principles) net income as revenue grew so rapidly; This was a big difference from the previous year’s net loss of $511 million.

Much of the decline in operating costs was attributed to the cancellation of the Robinhood founders’ award, which gave stock to the company’s founding team. This led to a $536 million reduction in stock-based compensation expense in the first quarter.

Why Robinhood shares could go higher from here

To Robinhood’s credit, it hasn’t been deterred by falling stock prices post-2021. The company continued to innovate and expand its product portfolio, and these initiatives began to bear fruit.

For example, it launched its retirement offering in January 2023 and already has more than 650,000 customers. In the first quarter, Robinhood’s assets under custody for its retirement segment exceeded $4 billion; This was a 14-fold increase compared to the previous year. Most of Robinhood’s customers are young, first-time investors; so if it can convince them to continue their decades-long retirement journey, it could provide a strong long-term income stream.

Robinhood is now valued at almost $15 billion. Based on trailing 12-month revenue of $2 billion, its shares are trading at a price-to-sales (P/S) ratio of approximately 7.6. This is significantly lower than the peak set in 2021 because the company’s revenue increased along with the decline in stock prices:

HOOD PS Ratio Table

I’ve previously argued that Robinhood’s shrinking user base and stagnant revenue warrant a low P/S ratio. But now that the top line has returned to growth, fueled by a significant acceleration in transaction revenue, it seems logical that the stock’s P/E ratio would rise further.

Therefore, there could be more upside ahead for Robinhood investors.

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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in Bitcoin and recommends it. The Motley Fool has a disclosure policy.

1 Cryptocurrency Stock Rises 30% in 2024, May Continue to Rise Originally published by The Motley Fool