It’s been an action-packed few weeks for Robinhood (NASDAQ:HOOD) stock after the shares began trading on the Nasdaq Composite on July 29.
After surging to highs of $85, the stock quickly corrected and closed below $50 on Friday. Robinhood CFO Jason Warnick recently commented that HOOD stock is “not a meme stock.” I would agree with that statement. Indeed, there are fundamental reasons to believe that Robinhood is well-positioned for long-term value creation.
HOOD Stock By the Numbers
Before looking at the company’s positives, let’s talk about the reasons that its shares quickly pulled back. On Aug. 18, Robinhood reported its second-quarter results. I believe that the markets were concerned about two aspects of its Q2 earnings.
First and foremost, Robinhood’s Q3 guidance was weak, and it remains to be seen if its growth will accelerate after Q3.
Robinhood reported healthy income of $233 million from cryptocurrency trading in Q2. However, 62% of its crypto trading volume involved Dogecoin (CCC:DOGE-USD). With the trading in Dogecoin having declined in Q2, Robinhood’s financial results might be negatively impacted by that development.
Additionally, the company’s average revenue per user was $112 in Q2, down from $115 during the same period a year earlier. In Q1 of 2021, its ARPU was $137. Therefore, its ARPU is significantly volatile, and that’s likely to make its EBITDA margin volatile.
As a matter of fact, Robinhood reported EBITDA margin, excluding certain items, of 16%, down meaningfully from 26% during the year-earlier period. And last quarter, its EBITDA margin, excluding certain items, reached its lowest point in the last five quarters.
Robinhood’s Long-Term Outlook Remains Positive
Even with these near-term concerns, I believe that Robinhood is well- positioned for long-term value creation. An important point to note is that U.S. real interest rates have been negative for an extended period. And it’s very likely that real interest rates will remain negative even after the Fed (likely) raises rates in 2022.
This is important because negative real rates facilitate higher trading and speculative activity across asset markets. In order to maintain their purchasing power despite negative rates, Americans will look to generate returns from equities, cryptocurrencies precious metals, and other investments and trading vehicles.
That is good news for Robinhood, which has positioned itself as a preferred trading platform for young investors. It’s worth noting that for Q2, the company reported monthly active users (MAUs) of 21.3 million. On a year-over-year basis, its MAUs increased 109%, while its assets under custody surged 205% to $102 billion.
Robinhood is also likely to benefit from the renewed surge of Bitcoin (CCC:BTC-USD). With altcoins also rallying, the crypto space has been attractive to investors for an extended period of time. In January, the number of global crypto users crossed 100 million. By July 2021, total global crypto users had doubled to 221 million. In the coming years, cryptocurrencies are likely to be a major cash flow driver for Robinhood.
In the wake of its IPO, Robinhood is sitting on a cash pile of $5.1 billion.
Given its asset-light business model, I believe that it will utilize its cash to make acquisitions. Additionally, Robinhood is likely to expand geographically in the next few years, boosting its addressable market.
The Bottom Line on HOOD stock
On the company’s Q2 earnings call, its CFO, Jason Warnick, said:
“We want to be the single money app. And so that really is about rolling out new products and new features. That said, in the short term, we have a number of things that are on our road maps that we’re going to deliver.”
The company is already offering access to IPOs., and its current product portfolio includes stocks, options, gold and cryptos. I believe that other asset classes and international equity investing might be in the cards for Robinhood.
Robinhood reported that its technology and development expenses had soared 249% YOY to $273 million in the first half of 2021. So the company has been significantly investing in improving its platform and user experience. In the long-term, however, its development and marketing expenses are likely to decline, enabling its EBITDA margin to expand.
Overall, Robinhood seems poised to generate robust cash flows in the next few years. Trading and speculative activity are likely to remain strong considering the interest rate environment. Further, cryptocurrencies are still in the early innings of growth. With multiple long-term positive catalysts, HOOD stock is worth accumulating at its current levels.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.