- Robinhood (HOOD) has excelled via product differentiation and cost leadership.
- Its stock has gathered systemic support amid a meme stock resurgence.
- HOOD is undervalued, thanks to its scale in topline earnings and its balance sheet liquidity.
It’s often difficult to gauge the potential of a stock when it’s traded chiefly on event-driven strategies. However, I believe I’ve cracked the code on Robinhood Markets (NASDAQ:HOOD) stock. Nothing gets me more excited than finding out what makes an asset tick, and I’ve discovered many factors that could affect HOOD’s stock in the future. I firmly believe that we have a stock on our hands that could sustain its “meme-esque” returns and yet provide us with positively skewed returns for years to come.
Here’s what I discovered and why I believe HOOD could lead to a long-term performer.
| HOOD | Robinhood Markets | $13.03 |
Innovation Has Been Pivotal
Much of Robinhood’s success as a business has been down to its ability to innovate within the realms of what’s desired from the modern-day consumer.
For example, last month, the firm illustrated its creative edge by extending its pre and post-market trading hours by two hours each. This move is part of Robinhood’s plan to commercialize a 24/7 stock market trading service.
The company’s management stated that they’ve “seen a community of Robinhood early birds and night owls who log in exclusively outside of regular market hours,” the company added: “Today’s launch is just another step on this journey, and we’re just getting started.”
I’m impressed by Robinhood’s ability to successfully apply cost leadership and product differentiation strategies. The brokerage industry is fiercely competitive because its industry lifecycle has already peaked. Thus, entering the market as successfully as Robinhood has, says quite a lot about the company’s managerial ability.
Systemic Support
Robinhood is once more thriving off of systemic support from retail traders after well-known meme stocks such as AMC Entertainment (NYSE:AMC) and GameStop (NYSE:GME) gained support towards the end of March.
According to Vanda Research: “The average retail investor portfolio has now clawed back a good portion of the (year-on-year) losses, offering some fresh buffer to punt on meme stocks,”
Robinhood stock has a close correlation to meme stocks due to the nature of its platform, which caters to the “decentralized finance” (DeFi) crowd who’re mostly not in support of traditional value-based investing.
Specifically, HOOD holds correlations with AMC and GME of 0.81 and 0.72. These correlations suggest that Robinhood stock probably won’t lose steam until meme stock investors decide they’ve had enough.
HOOD Stock: Is the Price Justified?
As an analyst, you always need to consider linear versus exponential company growth curves to make sense of valuation results. Based on its trajectory, I think Robinhood is very much underpriced, and here’s why.
Robinhood produced north of $1.8 billion in revenue during its financial year of 2021, an 89% year-over-year increase. Additionally, the brokerage firm added a staggering $35 billion in assets under custody during the year due to enhancing its platform with features such as in-app education, direct access to management via its acquisition of Say Technologies, and access to IPO shares.
I valued the stock with an asset-based valuation method, which brought me to a fair intrinsic value of $21.80, suggesting that HOOD stock is undervalued. Much of the firm’s value derives from the abundance of cash ($10.26 billion) it holds on its balance sheet.
It remains to be seen how Robinhood chooses to utilize its balance sheet liquidity, but one would imagine that it will ramp up its capital expenditure (capex) and acquisitions to fend off its competitors and gather valuable market share.
The Bottom Line for HOOD Stock
Robinhood stock is in great shape.
The firm’s ability to scale with cost-leadership and product differentiation strategies is a valuable asset.
Furthermore, Robinhood’s liquid balance sheet and stellar topline revenue growth mean that it’s an undervalued asset, which could reach multi-bagger status soon.
On the date of publication, Steve Booyens did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
