One of the primary reasons for investing your savings in individual stocks is to beat the broader markets. It means you need to identify stocks that have the potential to grow revenue and earnings at a consistent rate. While growth stocks can increase your wealth at an exponential rate, they are also vulnerable to an economic downturn. However, given their ability to derive outsized gains it makes sense to hold a few growth stocks in your portfolio.
Discount brokerage platform Robinhood (NASDAQ: HOOD) went public last week and until today this growth stock after its IPO was for the investors a very good purchase, let's see what the long term investment will turn out to be.
Robinhood - an overview
Robinhood is a DIY (do-it-yourself) investment platform and was founded back in 2013 by Vladimir Tenev and Baiju Bhatt. The broker offers commission-free trading services which allowed it to gain 100,000 users within the first month since Robinhood launched.
A report from Business of Apps shows us that monthly active users on Robinhood have climbed from 1 million in 2016 to 13 million in May 2020 and 20 million in April this year. It managed over $20 billion in total assets in 2020 with an average account size of $3,500.
The COVID-19 pandemic saw a surge in the number of retail traders on Robinhood who wanted to benefit from a volatile market. Robinhood allows users to invest in stocks, ETFs, and bonds that are primarily part of the U.S. market.
The company confirmed it currently has 17.7 million monthly active users and around 50% of its user base are first-time investors. Its total assets have grown to $81 billion, up from just $19 billion in March 2020.
In the first quarter of 2021, Robinhood generated $522 million in sales, an increase of 309% year over year compared to sales of $128 million in the prior year period. It stated options trading accounts for 38% of sales, followed by equities at 25% and crypto at 17%.
Why do you need to be wary of Robinhood?
While Robinhood has gained millions of users in a short period of time, investing in this business carries certain risks. It is part of a highly regulated industry and has several lawsuits that will impact the company in the near term.
The Securities and Exchange Commission levied a fine of $65 million while FINRA (Financial Industry Regulatory Authority) fined Robinhood $57 million due to multiple issues. According to Robinhood’s S-1 filing, it has 50 class-action lawsuits as Robinhood placed restrictions on trading shares of meme stocks including GameStop.
According to this report from Motley Fool, “Robinhood was forced to raised $3.4 billion in convertible notes after the National Securities Clearing Corporation (NSCC) upped its collateral requirements due to the one-sided GameStop trading.”
A key driver of Robinhood’s top-line growth is its cryptocurrency platform which was launched three years back. In Q1 of 2021, cryptocurrency transaction sales rose 20x to $87.6 million, accounting for 17% of total revenue. However, the ongoing bear market in the crypto space indicates that trading in this highly volatile market will decline at least in the next few months.
Finally, Robinhood is valued at a market cap of $35 billion after it raised $2.2 billion in its public offer. Its sales in 2020 stood at $959 million, indicating a trailing price to sales multiple of 36.5x which is extremely steep even for a high-growth company.
Its sales rose 245% year over year in 2020 and might double again this year. Robinhood like most other companies will thrive during periods of economic expansion but will remain under the pump if markets turn bearish and trading activity declines.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
