Robinhood Markets' Stock Price Drops 3.8% – Evaluating Its Value

Standing out among the Street's worst performers today is Robinhood Markets, a capital markets company whose shares slumped -3.8% to a price of $22.42, 6.05% above its average analyst target price of $21.14.

The average analyst rating for the stock is hold. HOOD underperformed the S&P 500 index by -4.0% during today's afternoon session, but outpaced it by 100.4% over the last year with a return of 124.2%.

Robinhood Markets, Inc. operates financial services platform in the United States. The company is part of the financial services sector, alongside a staggering variety of banking, mortgage, insurance,and credit service companies. If there is one common denominator among all companies in the sector, it’s that they are all dedicated to maintaining and developing new systems for the storage and transfer of value and risk.

Robinhood Markets's trailing 12 month P/E ratio is 160.1, based on its trailing EPS of $0.14. The company has a forward P/E ratio of 39.3 according to its forward EPS of $0.57 -- which is an estimate of what its earnings will look like in the next quarter. As of the second quarter of 2024, the average Price to Earnings (P/E) ratio for US finance companies is 15.89, and the S&P 500 has an average of 27.65. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

A significant limitation with the price to earnings analysis is that it doesn’t account for investors’ growth expectations in the company. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. Conversely, companies with high P/E ratios may be fairly valued in terms of growth expectations.

When we divide Robinhood Markets's P/E ratio by its projected 5 year earnings growth rate, we see that it has a Price to Earnings Growth (PEG) ratio of 0.57. This tells us that the company is largely undervalued in terms of growth expectations -- but remember, these growth expectations could turn out to be wrong!

When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Robinhood Markets was $1.18 Billion as of its last annual report. This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, HOOD is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 10.4% and has on average been $189.17 Million.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Robinhood markets's P/B ratio is 2.86 -- in other words, the market value of the company exceeds its book value by a factor of more than 2, so the company's assets may be overvalued compared to the average P/B ratio of the Finance sector, which stands at 1.76 as of the second quarter of 2024.

Robinhood Markets is likely overvalued at today's prices because it has a higher P/E ratio than its sector average, an average P/B ratio, and generally positive cash flows with an upwards trend. The stock has poor growth indicators because of its with a negative growth trend, and an inflated PEG ratio. We hope this preliminary analysis will encourage you to do your own research into HOOD's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.