Robinhood Q4: Improved Activity, Monetization, And Efficiency (NASDAQ:HOOD)

Over the past years, Robinhood Markets (NASDAQ:HOOD) has weathered its share of challenges, experiencing a period of decline and stagnation in its stock performance. However, recent developments have brought about significant improvements, marked by enhanced operational efficiency and a series of favorable market conditions within the last six months. These encouraging developments seem to have now materialized into discernible effects on the company’s stock valuation, a sentiment reinforced by its Q4 results.

Rapid recap

In my article on HOOD from August of last year, I recommended the stock as a buy, citing the efficiency improvements observed in the first two quarters of 2023. My buy thesis was grounded on the following reasons:

• Robinhood took necessary cost-cutting measures that helped the company improve efficiency, reduce costs, and achieve GAAP profitability.
• Average revenue per user (ARPU) was recovering fast toward the levels seen during the pandemic-driven trading activity, reaching $84 by the end of Q2 2023.
• Product expansion like retirement account, 24-hour trading, and Robinhood Gold.

After that, I upgraded my rating on HOOD to Strong Buy in my December article, which reviewed the perfect storm of tailwinds experienced by the company. Here are the main points from the article:

• Despite revenue miss in Q3 last year, major fundamental metrics, like RPU and EBITDA, surged up, driven by business growth.
• Increased crypto and stock trading activity, along with international expansions plans, were seen as major catalysts for growth.

Now that Robinhood has reported its Q4 results, we can see significant confirmations for the points driving the bullish thesis.

Q4 earnings confirmed continuing improvements in several key areas; bull thesis confirmed

On February 13, Robinhood reported its Q4 2023 earnings, significantly beating on EPS and revenue, sending shares to 52-week highs. Generally, the report confirmed most of the bullish assumptions from my previous two articles about the company and exceeded the market’s expectations regarding HOOD’s fundamentals.

In terms of headline numbers, Robinhood generated $0.04 in GAAP EPS (or $0.13 EPS on an adjusted basis) and $471 million in revenue, signifying a 24% year-over-year growth. Adjusted EBITDA came in at $133 million, or a record $536 million for the full 2023, translating into a healthy 29% margin. Looking at recent earnings history, Robinhood seems to have built strong momentum in terms of revenue growth and profitability improvements.

The drivers for this positive quarter can be divided into three major areas: increased user activity, improved monetization, and enhanced efficiency.

Increased user activity

Robinhood saw significantly higher user activity in Q4 2023 compared to the same period last year.

First, the number of investment accounts increased by ~3.5% year-over-year, reaching 23.8 million in the quarter. This metric is growing faster than the number of funded customers (which was 23.4 million in Q4) since a single funded customer can now have up to three investment accounts, including the classic individual brokerage and two types of retirement accounts – traditional IRA and Roth IRA. The compelling nature of these retirement products was one of the reasons for the Buy thesis in my August article, and now we see the positive impact of the first year after the introduction of these offerings.

Secondly, transaction-based revenues increased 8% year-over-year, reaching $200 million in the quarter compared to $186 million in Q4 2022. The surge was largely driven by higher volumes of equity and crypto-related trading, which rose 19% and 10% year-over-year, respectively. The uptrend in the broader market and the resurgence of crypto assets and trading were the clear catalysts here, as I reviewed in detail in my December article.

Finally, net deposits remained strong in the quarter, with an annualized growth of 21% and $4.6 billion in absolute numbers. Higher net deposits indicate that Robinhood is experiencing a greater influx of customer funds into the platform compared to outflows, which is essential for long-term growth. Here is the comment on this from the earnings call:

When we look at historical customer cohorts, we see they have consistently added to their net deposits over time, which we think provides a strong foundation for sustainable long-term asset growth. And newer cohorts are starting with balances, 1.5 to two times higher, which is even more encouraging.

Improved monetization

Robinhood also demonstrated improvements in monetizing its existing customers and funds held on the platform. One notable example is the substantial growth in HOOD’s net interest revenue, which increased by 41% year-over-year, reaching $236 million in Q4. Net interest revenues now constitute about 50% of Robinhood’s total sales, compared to 44% in Q4 2023 and just 17% in Q4 2022. While the higher FED’s rate clearly contributes to this growth, it also appears that the high net deposits, discussed above, help Robinhood increase the amount of funds available for the platform to invest in interest-generating securities, akin to the operations of most commercial banks.

Another encouraging development is the growth of Robinhood’s Gold business, a subscription offering that elevates monetization to a new level. In Q4 2023, the company had 1.42 million Gold Subscribers who pay a monthly fee in exchange for access to additional services. This represented an increase of 25% year-over-year and an adoption rate of 6.1%. The growth of Gold is promising as subscribed customers are more likely to show better retention and activity in the long term, not to mention providing a steady recurring source of additional revenues for the company.

As a result of these monetization improvements, average revenue per user increased from $66 in Q4’22 to $81 in Q4’23, supporting my buy thesis from August. Robinhood is now on the right track to return to the ARPUs seen during the pandemic (approximately $100), when the stock traded at about ~3 times higher than the current levels.

Better efficiency

On the efficiency front, the company continued to have controlled operating expenses, which went up only 14% year-over-year with 24% revenue growth. The absolute numbers also remained stable for the entire year of 2023, which I expect to continue as the company’s cost-cutting measures from last year are set to have a higher impact once the settlements after the layoffs are paid out, underscoring the efficiency improvements I reviewed in detail in my August article.

This led to a solid year in terms of adjusted EBITDA, with the LTM margin reaching a healthy 29%. Q4 was also the second quarter in the year when Robinhood achieved GAAP profitability. Coupled with a solid $5.3 billion in corporate cash and investments, this means that any potential financial risks are mitigated for the foreseeable future.

The slow pace of change in the market’s estimates leads to temporary undervaluation

The stock has surged on the results, but the market still seems to be slow to recognise the improvements done by the company. The earnings estimates for 2024 went up only after Q4 results, even though the business improvements were already evident in December, especially thanks to Robinhood’s monthly business updates. However, 2025-2026 estimates still seem too pessimistic and do not reflect the rapid improvements done by the company.

Even with these estimates, the company is still valued at just 5.5x sales and 60x EPS for 2024. Given the strong revenue growth and rapid profitability improvements, the valuation remains very conservative. This is especially evident given the strong start to 2024, as indicated by Robinhood CEO Vlad Tenev:

2023 was a strong year as our product velocity continued to accelerate, our trading market share increased, and we started to expand globally. And we’re off to an even better start in 2024, as we’ve already brought in more Funded Customers and Net Deposits through the first half of Q1 than we did in all of Q4 2023.

As a result, I reiterate my market cap target for HOOD of around $15 billion, which would translate into approximately $18 in stock price, representing a ~30% increase from the post-earnings price points.

Remaining risks and negatives

Despite solid overall performance, there are still some risks and negative indicators from HOOD’s Q4.

One of the most significant negatives is the fact that the monthly active users (MAU) metric remains somewhat depressed, continuing its slow year-over-year decline: Q4 MAU reached 10.9 million, compared to 11.4 million in the same period of 2022. Additionally, although ARPU improved year-over-year, the metric seems to have stagnated over the last 3 quarters, fluctuating around $80. While these points are not major issues yet, as the company is able to better monetize its users and the funds held on the platform, for the sake of future growth, Robinhood will need to find ways to revitalize growth in both active users and revenue per user.

Additionally, strong Q4 results were partly driven by increased crypto and equity trading activity, which tend to be volatile. Trading activity, in general, is also usually influenced by general market trends (bull markets tend to have higher trading volumes), which are outside of Robinhood’s control. This means the company needs to still focus on and invest in other monetization strategies, like Gold, credit card business, or Retirement, which could offset lower potential trading volumes.

Finally, we are still to see the actual effects of international expansion; the company expanded into the United Kingdom and launched crypto trading in the EU in Q4 2023. Since expansion is usually associated with an initially increased need for investment, there is no guarantee these efforts will pay out.

Key takeaways

Robinhood’s Q4 2023 earnings report not only delivered impressive financial results but also validated the bullish thesis I outlined in my previous articles. Back in August of last year, I recommended Robinhood as a buy, primarily based on the company’s notable efficiency improvements observed during the first two quarters of 2023. Building on these insights, I upgraded my rating on HOOD to Strong Buy in my December article, where I examined a confluence of tailwinds propelling the company forward.

Now, with the Q4 earnings release, these forecasts seem to have been validated. The company significantly beat EPS and revenue expectations, driving shares to 52-week highs and exceeding market forecasts for its fundamentals. The positive quarter was underpinned by three major factors: increased user activity, improved monetization, and enhanced efficiency, setting up the stock for a positive future.

As the market seems to be slow in adjusting the estimates after the earnings, the stock remains undervalued despite a notable post-earnings surge. Therefore, my Strong Buy rating for HOOD can be reiterated, with a price target of about $18.