Volatility has returned in full force in the tech sector, and as usual Robinhood (NASDAQ:HOOD) bears the brunt of fear and caution overtaking the markets. The tech-oriented brokerage has seen a whiplash of a year, driven by 2022’s cryptocurrency crash and bursting interest rates putting dents across all asset values.

Despite investors’ hesitation to stake their confidence in Robinhood, I think there are plenty of drivers for a rebound in this stock. Up only ~10% year to date (but still down more than 80% from post-IPO highs), investors would be wise to revisit the bull case for Robinhood in the long run:

The key storyline for Robinhood, of course, is that it is the main brokerage gaining market share among younger investors. As millennials and Gen Z enter their prime earning years, Robinhood will continue to benefit from wealth accretion and continued deposit growth.

Here is my full long-term bull thesis for Robinhood:

• Robinhood is dominating in the millennial/Gen Z demographics that will soon overtake the bulk of worldwide wealth. Traditional brokerages are still catching up to Robinhood’s popularity. Market cycles have always occurred and will continue to occur; there will be periods of frenzied trading and there will be periods of calm. But over the arc of time, Robinhood’s share of market activity will grow.
• Product innovation never stops. Part of what makes Robinhood so appealing is that it’s often first-to-market (or at least, first to popularize) many new key features. Crypto trading, cash advances, and easy access to low-cost margin were some of Robinhood’s key defining advantages. Retirement accounts will help attract an even wider pool of assets to Robinhood.
• Diversified revenue streams. When interest rates were low and cash was cheap, Robinhood benefited from buoyant market activity. But now, as interest rates have shot up and put a chill over trading volumes, Robinhood is benefiting from higher interest spreads. Put in other words, Robinhood has now navigated through the recessionary cycle and has proven itself capable of sustaining.
• Profitability in mind: When trading volumes were high in 2021, Robinhood generated positive adjusted EBITDA every quarter. Amid the current trading crunch, the company is making targeted structural adjustments to its workforce to enable it to maintain profitability going forward. While the down cycle in the markets won’t last forever, the belt-tightening and operational discipline that Robinhood is exercising now will certainly sustain.

Right now, Robinhood is experiencing tremendous volatility due to macro market headwinds. An entire generation of investors who traded very actively during the pandemic are experiencing their first downturn, and trading volumes are down as a result. Crypto, once Robinhood’s most lucrative segment, is also under fire from higher interest rates, despite previous thinking that crypto is an asset with very low correlation to mainstream market factors.

The best approach here is to ignore all the cyclical macro factors and to focus on the more permanent drivers to Robinhood’s business: deposit growth and improvements in profitability. And on the latter front, note as well that although Robinhood focuses on adjusted profitability measures that exclude stock comp, Robinhood’s founders also gave up nearly $500 million of stock awards in the near term – which should lead to lower stock-based comp and dilution:

All in all, there are a lot of reasons to buy Robinhood while the stock remains low. I remain bullish on the name and am retaining it in my portfolio until it crosses at least the mid-teens.

Q4 download

Let’s now discuss Robinhood’s latest Q4 results in greater detail.

The first positive highlight to call out: in Q4, the company achieved $4.8 billion in net-new deposits, up 30% y/y – the strongest growth rate since Q2 of 2021.

The company is benefiting from two factors here. First, it’s gaining traction from its IRA products, which it launched in December. The company has not yet reported how many retirement accounts it has opened, but total net cumulative funded accounts grew by 50k to end Q4 at 2.3 million, a record for the company. Secondly, higher interest rates (Robinhood is offering 4.15% interest for its Gold customers) are encouraging Robinhood clients to sweep cash out of low-interest bank accounts and other brokerages and shift them to Robinhood. (Personal disclaimer here: I am a Robinhood customer and I’ve done just that, concentrating my uninvested cash in Robinhood for the sake of its unbeatable interest rate).

Of course, Robinhood is still suffering from lower overall assets under custody (-37% y/y to $62 billion), driven entirely by market valuations. Transactional revenue is also down -30% y/y, hurt by lower crypto and options activity (at one point as shown in the chart below, crypto generated more than $200 million of revenue in a quarter, versus the new crypto run rate of $40 -$50 million in quarterly revenue):

The offset here, however, is interest income, helped in part by net-new deposits and higher cash balances (cash is $8 billion of Robinhood’s net $62 billion of assets under custody, and that cash portion is up 242% y/y). As shown in the chart below, net interest income grew by an astounding 165% y/y:

Put together, Robinhood’s revenue in Q4 of $380 million grew 5% y/y and 5% sequentially, with the 165% y/y growth in net interest income offsetting -30% y/y declines in transactional revenue.

Revenue stability also combines well with cost controls. The company achieved $82 million in adjusted EBITDA in Q4, representing a 22% margin. It’s important to note that the company’s high watermark for revenue was Q2’21 (coinciding with the peak of crypto trading activity), and in that quarter the company had only delivered $90 million of adjusted EBITDA at a 16% margin. Translation: Robinhood is becoming leaner and more profitable over time.

CFO Jason Warnick even commented on the Q4 earnings call that Robinhood has a potential path to GAAP profitability by the second half of 2023, driven in part by the founders’ decision to forego stock awards this year:

Looking forward to 2023, we’re planning to improve our costs by another 7% on average as we plan to keep our costs lean, while investing for future growth. Our outlook for 2023 OpEx prior to SBC is a range of $1.42 billion to $1.48 billion. I’d note that on a quarterly basis, this outlook is about the same as the Q4 2022 range we provided last quarter, as I think this is a good zone to operate our business this year.

Turning to SBC, it was $160 million in Q4, which brings our full year total to $654 million. Looking ahead, Vlad and Baiju’s decision to cancel their 2021 pre-IPO market-based awards significantly lowers our outlook for the back half of this year. Under accounting rules, we will record a Q1 non-cash charge of about $485 million for the full acceleration of the canceled awards. We also expect SBC this year, excluding the charge, to be in a range of $470 million to $550 million, which is a 22% improvement on average from last year.

Including the charge, our full year 2023 SBC outlook is a range of $955 million to $1.035 billion. For Q1, we expect SBC of $615 million to $645 million mostly from the accounting charge. Given our progress on costs over the past year and improved SBC outlook, we now expect to get much closer to positive GAAP net income in the back half of this year. Beyond that, we think it’s a little early to predict a specific timeline for reaching GAAP profitability as our revenues vary with the market backdrop. That said, we’re focused on getting there by keeping our costs lean and scrappy to drive operating leverage as our business grows, while staying flexible to invest for the long-term.”

Key takeaways

Robinhood has always been sensitive to market volatility, but investors who have a long-term mindset and can stomach short-term fluctuations should take the opportunity to buy into the stock now. Longer term, Robinhood continues to attract deposits and grow alongside its younger investor base, while also strengthening its profitability through the efficiency initiatives it kicked off last year. Stay long here.