Robinhood (HOOD), the online broker that offers commission-free trades of stocks, exchange-traded funds (ETFs), and cryptocurrencies, has been drawing some high-profile headlines lately. In addition to reporting its first profitable quartersince its July 2021 IPO, the trading platform is attracting attention from a couple of notable market participants. Specifically, notorious fund manager Cathie Woodis bulking up on the stock, while at the same time, tech giant Alphabet (GOOGL) has been slashing its stake in the company.

So, who is making the right move - Cathie Wood, who appears to be betting on the future growth of Robinhood? Or is it seasoned tech giant Alphabet, who apparently believes additional upside is limited? Let's take a look at where the stock stands after earnings, and where it might be headed next.

Alphabet and Cathie Wood: Mixed Moves in Robinhood Shares

Last week, Wood's ARK Investment, through three of its funds, purchased 933,663 shares of Robinhood for a total of $10.66 million. Besides its flagship Ark Innovation ETF (ARKK), the other two funds which added shares of Robinhood from the ARK Investment stable include the Ark Fintech Innovation ETF (ARKF) and Ark Next Generation Internet ETF (ARKW).

Meanwhile, in a recent filing, Alphabet revealed that its venture capital arm has unloaded roughly 90% of its stake in the trading app. At the end of the June quarter, Google parent Alphabet held 612,214 Robinhood shares valued at $6.11 million. This is a far cry from its sizeable position at the end of the March quarter, when it held a 4.93 million shares valued at $47.86 million.

Why is Wood Bullish on HOOD? 

In its latest quarterly results, Robinhood reported net revenues of $486 million, up 53% from the previous year and above the consensus estimate of $474 million. More notably, for the first time ever since its public listing on July 2021, Robinhood reported a profitable quarter. 

The trading platform reported EPS of $0.03 per share, compared to a loss of $0.34 per share in the year-ago period. Those results comfortably outpaced the consensus estimate for a loss of $0.01 per share.

Meanwhile, net interest revenue jumped 216% year-over-year to $234 million, driven by growth in interest-earning assets ($26 billion, up 16% sequentially), higher short-term interest rates, and increased securities lending activity. Also, net cash provided by operating activities came in at $370 million in Q2, compared to an outflow of $1.2 billion in the prior year.

The company also recorded sequential growth of 9.1% and 13% in average revenue per user and assets under custody to $84 billion and $89 billion, respectively - both key operating metrics.

Along with this encouraging performance, Cathie Wood may have been enthused by Robinhood's product roadmap, too. In July, Robinhood acquired X1, a platform that offers a no-fee stainless steel credit card with rewards on each purchase. Moreover, the company remains firmly on track to launch its services in the UK. 

Additionally, the company's burgeoning IRA assets (about $1 billion) and its rising Robinhood Gold cash sweep balances (which offer an attractive yield of 4.9%, and have more than doubled assets to $11 billion since the start of the year) may have also played a part in the maverick investor upping her stake in the company recently.

Why is Alphabet Bearish on Robinhood?

Despite the highlights above, one key reason that sparked the post-earnings drop in Robinhood stock was its declining monthly active users count. Monthly active users (MAUs) for the second quarter stood at 10.8 million, down roughly 23% from the prior year. Worryingly, the decline has been quite persistent for the last two years, having collapsed from 21.3 million in Q2 2021 to 10.8 million in Q2 2023.

Another negative factor is Robinhood's falling transaction-based revenues. The company reported a transaction-based revenue figure of $193 million, which denotes a decline of 4% from the previous year. Notably, transaction-based revenues have been declining alongside MAUs over the years too, off from a peak of $451 million in Q2 2021 to $193 million in Q2 2023.

Plus, revenues from crypto transactions fell 18% to $31 million in the period, marking another sequential decline for this metric. Revenue from equity and options transactions also declined.

Valuation

When it comes to valuation, Robinhood appears to be fairly valued when compared to its peers.

At its price-to-cash flow (p/cf) ratio of 8.82, HOOD is priced at a premium to Stifel Financial (SF) (7.18) and Jefferies (JEF) (7.73), but considerably lower than Houlihan Lockey (HLI) (18.43), and Futu Holdings (FUTU) (22.55).

Looking at the price-to-book (p/b) ratio, HOOD's 1.42 is again higher than Jefferies at 0.82 - but lower than HLI (4.22), FUTU (3.05) and SF (1.43).

However, when it comes to the price-to-sales (p/s) ratio, Robinhood appears to be priced at a premium compared to most of its peers, at 7.54. This is higher than the p/s ratio of Jefferies (1.31), Houlihan Lockey (3.78) and Stifel Financial (1.53), though it's lower than Futu Holdings (8.68).

Following the stock's post-earnings pullback, shares of Robinhood are up 32.9% so far in 2023, narrowly underperforming a 38.7% gain for the Nasdaq QQQ Invesco ETF(QQQ).

Analyst Estimates

Analysts remain upbeat about the earnings growth capabilities of Robinhood. The consensus is calling for earnings per share to rise 53.85% and 129.63% in FY 2023 and FY 2024, respectively.

Despite those robust earnings growth expectations, analysts maintain a consensus “Hold” rating on the stock, with a mean target price of $11.96 - indicating 10.5% upside potential from current levels. Out of 12 analysts covering the Robinhood stock, 3 have a “Strong Buy" rating, 5 have a “Hold” rating, 1 has a “Moderate Sell” rating, and 3 have a “Strong Sell” rating.

Final Takeaway

Amid all the buying (by Cathie Wood) and selling (by Alphabet), Robinhood shares have held up quite well, as evidenced by their rise in 2023 so far.

I remain cautiously optimistic about the stock for several reasons. First and foremost is its newfound profitability. The company moved into the black for the very first time since its IPO, which should build confidence in the stock. 

Second, Robinhood's operational strength is evident from the rise in assets under custody, and ARPU is a tailwind, too. 

Third, the company's move into the credit card space with the X1 acquisition can be a positive for future growth, potentially helping to offset ongoing weakness in crypto transactions. 

Finally, HOOD's reasonable valuations, coupled with upbeat analyst estimates on EPS growth, give it a solid footing for additional upside.

Investors looking to follow suit with Cathie Wood and build a position in Robinhood stock should go ahead - but proceed with caution, and add shares in smaller amounts rather than one large purchase, as I believe the stock will continue to be volatile in the near term.