$HOOD Profitability Is Within ReachRobinhood Markets, Inc (NASDAQ: HOOD) is currently benefiting from the high interest rate environment since its interest revenue has increased 278% from last year. Furthermore, Since the brokerage is expecting a seasonal increase in its other revenues, that coupled with the net interest revenue growth, will push it over to profitability – beating its EPS estimates of -$0.01 according to our projections. With the brokerage set to release its Q2 earnings report on August 2 after-hours, going long on HOOD stock ahead of its earnings may be a profitable decision.
HOOD Fundamentals
Q1 Financials
Robinhood posted $441 million in revenue in Q1 2023, which represented a 47% YoY increase. While transaction revenue declined by 5% and other revenues stayed relatively flat at $24 million, the brokerage’s net interest revenues increased by almost 280%. The increase in net interest revenue can be mainly attributed to the high-interest rate environment that gives Robinhood better margins and the steady monthly net deposits it has been seeing.
While the $511 million net loss may turn off some investors, the increase in net loss is mainly due to a one-time expense of $485 million related to the 2021 Founders Award Cancellation. Without the added $485 million Robinhood would’ve only realized around $26 million in net loss which would be almost a 97% YoY decline and would’ve seen it close to profitability.
Robinhood also ended the Quarter with no debt, and while its current ratio has been declining over the past five quarters, its current assets can still cover its current liabilities.
With that in mind, Robinhood’s current liabilities have been increasing QoQ since Q1 2022. In Q1 2022, the brokerage had $11.5 billion in current liabilities. Out of its current liabilities, $7.1 billion were payables to users which are free credit balances from users’ uninvested deposits attributed to users as a result of settled trades and other security-related transactions. The company’s current liabilities skyrocketed in Q1 2023 to $20.6 billion despite payables to users declining to $4.9 million.
While this may seem like a negative thing, it is important to note that the increase in current liabilities is the result of the company reporting $11.4 billion in user cryptocurrencies safeguarding obligation which is required for the brokerage to report since it is safeguarding cryptocurrencies due to the launch of its crypto wallet in April 2022. In fact, this obligation increased from $8.4 billion at the beginning of 2023 which is a good sign that Robinhood’s crypto wallet product is seeing more users.
Q2 Forecast
Robinhood’s current EPS analyst estimate is around -$0.01, and we are projecting that it can beat this EPS estimate. The brokerage’s management forecasted its net interest revenue to be $223 million in Q2 and its other revenues to increase by $30 million due to a seasonal increase in Q2, putting it around $56 million, which only leaves transaction revenue unknown.
In April and May, Robinhood saw 11.5 million and 10.6 million monthly active users respectively, which adds up to an average of 11.05 million monthly active users. We can use the average monthly active users to estimate the transaction revenue for Robinhood. Apart from Q3 2022 when the brokerage has seen above average equity trading volume, Robinhood’s average transaction revenue per MAU grew in a smooth, linear fashion.
From the chart, we can forecast the average transaction revenue per MAU to be around $18.7 which adds up to a transaction revenue projection of $206 million. That said, the lower trading volume in April and May compared to Q1 may influence the average transaction revenue per MAU, but that is still to be seen.
Quarter Monthly Average Users (million) Average Transaction Revenue Per MAU Transaction Revenue (million)
Q1 2022 15.90 $13.71 $218.00
Q2 2022 14.00 $14.43 $202.00
Q3 2022 12.20 $17.05 $208.00
Q4 2022 11.40 $16.32 $186.00
Q1 2023 11.80 $17.54 $207.00
Q2 2023 *11.05 *$18.68 *$206.38
This means that Robinhood’s total revenue projection should be around $485 million, a more than 50% YoY increase, after adding the management’s forecast for net interest revenue of $223 million and other revenue of $56 million. Furthermore, since Robinhood already went below its OpEx excluding SBC range estimates, I’m going to use the lower end of its OpEx guidance, which is around $355 million. Adding the $122 million, which represents the midpoint of the management SBC estimates in its Q1 earnings call, would see the total operating expenses reach $477 million. That means that Robinhood would realize $8 million in net income and record an EPS of $0.01.
All in millions except EPS
Revenue $485
Operating Expenses $477
Net Income $8
Outstanding Shares 903
EPS $0.01
Risks
Robinhood’s monthly active users have been declining for the past 5 months and have been seeing an overall downward trend in its YoY monthly active users growth.
While Robinhood hasn’t seen its effect on its revenues yet due to the incredible growth of its net interest revenues, when interest rates start going down again in 2024, it will pose a problem for Robinhood since its net interest revenues will have lower margins. That means Robinhood will have to grow its monthly active users if it wants to maintain its current level of revenue.
Technical Analysis
HOOD stock is trading in a bullish trend as it is trading in an upward channel. Looking at the indicators, the stock is above the 200, 50, and 21 MAs which is a bullish indication. However, it is worth noting that the stock is currently testing the 21 MA support. Meanwhile, the RSI is neutral at 58 and the MACD is neutral as well.
As for the fundamentals, HOOD stock has a significant upcoming catalyst in its Q2 earnings on August 2 after-hours. Given that the brokerage may post a profit according to our projections, the stock may soar. For this reason, investors could wait for the stock to retest the lower trendline to enter long positions ahead of the brokerage’s Q2 earnings.
HOOD Forecast
Robinhood had an overall good Q1, with the company reducing its operating expenses prior to SBC and being close to achieving break even if we excluded the one-time payment of $485 million. Furthermore, the brokerage is seeing incredible net interest revenue growth and expects a $30 million seasonal increase in other revenues. Based on this, and our projections, the brokerage may be on track to post a profitable quarter, which is why going long on HOOD stock may be a profitable investment.
