Robinhood has been on fire lately. In the past six months alone, the company’s stock price has rocketed 115%, reaching $101.00 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Why Is HOOD a Good Business?
With a mission to democratize finance, Robinhood (NASDAQ:HOOD) is an online consumer finance platform known for its commission-free stock and crypto trading.
1. Eye-Popping Growth in Customer Spending
Average revenue per user (ARPU) is a critical metric to track because it measures how much the company earns in fees from each user. ARPU also gives us unique insights into the average transaction size on Robinhood’s platform and the company’s take rate, or "cut", on each transaction.
Robinhood’s ARPU growth has been exceptional over the last two years, averaging 40.9%. Its ability to increase monetization while growing its funded customers demonstrates its platform’s value, as its users are spending significantly more than last year.
2. Outstanding Long-Term EPS Growth
We track the change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Robinhood’s full-year EPS flipped from negative to positive over the last three years. This is a good sign and shows it’s at an inflection point.
3. Excellent Free Cash Flow Margin Boosts Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Robinhood has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the consumer internet sector, averaging an eye-popping 67% over the last two years.
Final Judgment
These are just a few reasons why we think Robinhood is an elite consumer internet company, and after the recent rally, the stock trades at 43.2× forward EV/EBITDA (or $101.00 per share). Is now the time to initiate a position?
