Revisiting Robinhood after the $140 "Pounding the Table" Short Report
Hello,
I hope you are all well. I am revisiting Robinhood after its steep decline to see if there’s an opportunity brewing. If you recall, I was long $HOOD at 33, averaged up at 65 when I pitched it as a long idea, and exited the entire position at an average of 116. I later wrote a “short report” and pounded the table when it hit 140.
If you missed my original post on $HOOD, here is the TL;DR on why I felt it was a short:
Transaction revenues are increasingly reliant (>50%) on Options speculation and Crypto revenues. They are highly cyclical and of a low quality.
Net Interest is a high margin source of revenue which has become a bigger proportion of Total Revenues and a contributor to the Bottom Line. It is at threat for 2 main reasons:
With significant rate cuts almost guaranteed when Chairman Powell steps down, logically Net interest will come under threat.
Furthermore at present, interest earned on segregated cash, securities and deposits (i.e customers cash) is larger than the Interest on corporate cash and investments. In a Bear Market, customers hold less cash on the platform if past trends play out.
We could be entering peak cycle in coming quarters and HOOD has a >30x sales multiple. For a cyclical company this is a red flag.
Cascade of the above factors: cyclicality, lower rates, less cash on the platform plus a Market correction/Bear Market would be deadly for the stock.
Below we will take a look at each of the listed points. Full disclaimer, I am not long or short HOOD at this time.
Composition of Transaction Revenues
In Q1 2025, Options and Crypto accounted for over 53% of transaction revenue. While revenue from these segments has continued to grow, they now represent only 41.7% of the total. Other transaction-based revenue streams, such as prediction markets, futures, and instant withdrawals, have increasingly contributed to the mix.
I believe this reduced reliance on Options and Crypto is exactly what you want to see if you are a $HOOD bull.
Net Interest Reliance
Net interest is a high-margin revenue source that has become a significant portion of total revenue and a primary driver of the bottom line. In fact, throughout 2023, it accounted for roughly 50% of total revenue for most of the year, though that contribution has since trended lower.
I previously wrote that rate cuts would be a major threat to net interest, as would customers keeping less cash on the platform. However, taking recent events into consideration, it seems very unlikely we will see any rate cuts this year. In fact, we may even see rate hikes. Furthermore, looking at recent quarters, while interest earned on customers’ cash decreased QOQ, it was up robustly YOY. Meanwhile, margin interest continued to grow both QOQ and YOY.
To me, this shows that under current circumstances, Robinhood is likely to preserve net interest revenue better than I previously anticipated.
Peak Earnings and Extreme Valuation
One of the concerns I highlighted previously with Robinhood was that we could be entering a peak cycle in the coming quarters, noting that "$HOOD has a >30x sales multiple—a red flag for a cyclical company."
At its peak, $HOOD was trading comfortably above 30x sales and 65x earnings. The stock has since been cut in half and has undergone multiple compression; it now trades at 12x forward sales and an estimated 30x earnings. This is a more palatable, though not necessarily cheap, valuation for a cyclical company potentially late in a bull market.
Deadly Cascade Effect
As the chart illustrates, the cascade of aforementioned factors has indeed proven deadly for the stock. It is currently down 55% from its October high and 39.45% YTD.
Conclusion
Given the factors above, the short thesis has been vindicated. For $HOOD shareholders, the significant pullback and subsequent multiple compression now offer a much more attractive risk-reward profile at these levels.
Personally, I am not in a rush to buy or get long but it is certainly more palatable down here than it was in recent months.
If you are looking for a fresh long entry in $HOOD, I recommend waiting to see if the $65–$66 area holds. This is a prior resistance level that we now want to see act as support.
From there, I would look to establish a position by following the steps highlighted in the post below:
Thank you for reading and see you for the next one!