Is This Cathie Wood Stock Overvalued with a 74% YTD Increase?

Robinhood Markets (HOOD) stock, valued at $20 billion by market cap, is a key holding in fund manager Cathie Wood’s portfolio. HOOD accounts for roughly 4.9% of Wood’s flagship Ark Innovation ETF (ARKK), making it the fund’s No. 7 holding by weight.

While shares of the trading platform have gained 74.1% year-to-date, thanks in large part to investor optimism over its crypto exposure, HOOD is still down 73.9% from all-time highs.

Let’s see whether this Cathie Wood stock should be part of your equity portfolio in June 2024.

Strong Q1 Results for Robinhood

The performance of trading and investment platforms such as Robinhood is generally tied to the state of the equity markets. During bull runs, trading volumes increase significantly, allowing Robinhood and its peers to generate significant revenue from transaction fees and commissions. Alternatively, volumes nosedive during bear markets, resulting in lower sales and profits.

Due to improving market conditions, Robinhood reported Q1 revenue of $618 million and earnings of $0.18 per share, compared to estimates of $549 million and $0.06 per share, respectively. In the year-ago period, the company reported a net loss of $511 million, or $0.57 per share.

As investor sentiment improved significantly toward crypto assets, Robinhood’s crypto transactions accounted for $126 million in sales in Q1. However, Robinhood recently disclosed it received a “Wells” notice from the U.S. Securities and Exchange Commission (SEC), which indicates its crypto business might attract a legal enforcement action.

Robinhood ended Q1 with 23.9 million customers, while its assets under custody rose to a new record of $129.6 billion, an increase of 65% year over year.

A Big Ticket Acquisition

Last week, Robinhood disclosed plans to acquire Bitstamp, a crypto exchange with a vast presence in Europe. The all-cash deal, valued at $200 million, is Robinhood’s largest-ever acquisition to date. Robinhood expects the acquisition to be completed within the next 12 months as it looks to gain traction among crypto investors globally.

Bitstamp has more than 50 active licenses and registrations with customers in the EU, the U.K., the U.S., and Asia. Robinhood Crypto’s general manager, Johann Kerbrat, explained, “Through this strategic combination, we are better positioned to expand our footprint outside of the U.S. and welcome institutional customers to Robinhood.”

Robinhood continues to diversify its product portfolio, and recently stated it would soon begin issuing credit cards. With access to roughly 24 million customers, Robinhood will find it easier to cross-sell its new products and increase customer spending over time.

Is HOOD Stock Overvalued?

Last week, Robinhood announced its first-ever stock buyback program, in which it plans to repurchase shares worth $1 billion in the next three years. Generally, a company initiates a buyback program if management believes the shares are undervalued.

Robinhood ended Q1 with $5 billion of balance sheet cash, and can easily fund its buyback program with available liquidity. According to Barclays, the company might buy back 49 million shares, or 6% of its total outstanding stock, over the lifetime of the buyback plan – which it says “could be supportive over time from a valuation perspective.”

Out of the 16 analysts tracking HOOD stock, five recommend “strong buy,” six recommend “hold,” and three recommend “strong sell.” The average target price for HOOD is $19.70, which is lower than the current trading price.

Analysts tracking Robinhood expect it to report adjusted earnings of $0.51 per share in 2024, compared to a loss of $0.61 per share in 2023. So, priced at 45x forward earnings, HOOD stock is not too expensive, especially if it can successfully integrate the Bitstamp acquisition and benefit from cost synergies.

On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.