Just by understanding the ebb and flow of the market, it’s difficult not to express some skepticism regarding financial technology giant Robinhood (NASDAQ:HOOD). By no means is that a slight against the enterprise. Over the past 52 weeks, HOOD stock has skyrocketed to the tune of nearly 369%. Clearly, an extended and robust performance like that doesn’t just materialize as a fluke. However, there are obviously overvaluation concerns — concerns, while legitimate, require a broader context.
Of course, it’s difficult to see any context when looking at the raw numbers. On Wednesday after the market close, Robinhood will disclose its fourth-quarter earnings results. For the full year 2024, analysts anticipate earnings per share to land at $1.28, implying an expansion of 161.22% over the prior year’s print. On the top line, sales may land at $2.85 billion, up a whopping 52.68% from 2023’s haul.
These are impressive figures no matter how one cuts it. However, the issue now is the valuation. For fiscal 2025, analysts are looking at EPS to land at $1.42. At the current price of $56.27 per share, HOOD stock is trading at a forward earnings multiple of nearly 40X. In terms of revenue, experts anticipate a tally of $3.37 billion. Even so, the forward sales multiple would clock in at an unsightly 14.76X.
So, should investors fret? Not quite and here’s why.
One of the most important aspects of Robinhood’s forward trajectory is its diversification and expansion of services. Moving beyond commission-free stock trading, the underlying fintech platform now includes cryptocurrency trading, options and cash management services. Further, Robinhood’s acquisition of TradePMR pits the company against industry leaders in wealth management, enabling it to grab more pieces of the financial pie.
Another factor to consider is the international growth initiatives. Robinhood CEO Vlad Tenev is aiming to be the go-to financial app in the British market. Yes, such ambitions will take time and money to realize. However, it’s important to note that when assessing HOOD stock, one can’t just simply note the ratios. Instead, there has to be some thought regarding how much Robinhood’s addressable market will expand thanks to various growth strategies.
What gets lost in the analytical noise surrounding HOOD stock is the statistical trend of its price action. Since making its public market debut, HOOD has demonstrated an upward bias, providing confidence in the bullish narrative.
From a stochastic (or temporal) view, a position entered at the beginning of the week has a 52.46% chance of rising by the end of it. The long odds are better than a coin toss for the two week and three-week intervals. Admittedly, over a four-week period, the bias shifts slightly negatively to 49.17%.
However, what’s really intriguing is that Robinhood investors appear motivated by FOMO or the fear of missing out. For example, last week, HOOD stock gained 15.2%. During times when HOOD posts a one-week return between 10% and 20% (let’s call it an extreme-greed event), the long odds for the subsequent week soars to 73.33%.
To be fair, I would take such odds with a grain of salt. At some point, the statistical trend will not play out — and it’s not clear when the trend will break. Nevertheless, it’s worth noting that in the fourth subsequent week following an extreme-greed event, the long odds stand at 60%.
Moreover, under the positive scenario, HOOD’s median four-week return clocks in at 16.25%. Under the negative scenario, the median loss sits at 12.63%. Based on last Friday’s closing price of $55.86, HOOD could potentially rise to $64.94 by the options chain expiring March 7 or decline to $48.81.
While HOOD stock may be pricey, the underlying company is busy creating the foundations to be a global fintech juggernaut. Arguably, that’s worth the premium. Therefore, the easiest way to approach Robinhood is to simply buy its equity in the open market.
Just like I mentioned with Palantir (NASDAQ:PLTR) — which I also described as a FOMO stock — HOOD can keep rising thanks to the robust fundamentals.
For an aggressive but balanced options strategy, you could consider the 50/65 bull call spread for the options chain expiring March 7. This trade will need HOOD stock to hit the $65 short strike price, which just might be possible with some luck (and an earnings beat). Further, the $50 long call provides some salvageable value for the vertical spread in case the bullish thesis doesn’t quite pan out.
For another aggressive options strategy, you may consider (for the same expiration date) the 60/64 bull call spread. This transaction lowers the short call, making the target more probabilistically reasonable. However, the tradeoff is that the $60 long call is also out the money (OTM), meaning that this trade risks losing all salvageable value if the upside thesis goes awry.
Still — and I’ll leave on this note — the narrow OTM spread means that, at time of writing, the net debit paid is only $137 for the chance to earn a maximum payout of $263.
