In a notable shift within the financial services industry, Robinhood has revolutionized the discount brokerage landscape, compelling traditional competitors to adopt its model of commission-free trading. Since its initial public offering in mid-2021, the company has rapidly gained traction, expanding its offerings to include innovative features like cryptocurrency trading and sports betting. However, Robinhood’s relatively short history raises questions about its performance in more challenging market conditions, specifically during downturns.
In stark contrast, Visa, which went public during the tumultuous period of the Great Recession in early 2008, has established itself as a stalwart in the payment processing sector. The company benefits from the ongoing transition from cash to card payments, with e-commerce significantly driving its growth. Visa has shown remarkable resilience, reflecting stability and consistent performance over the years.
Recent financial metrics reveal key differences between the two firms. Visa’s revenue has grown at an annualized rate of 11% over the past decade, while earnings have risen by 14% annually. Despite the perception of Visa as a premium stock, its price-to-sales (P/S) and price-to-earnings (P/E) ratios are currently below their five-year averages, indicating a fair valuation for growth investors. The market’s current pricing suggests that while Visa’s stock may appear expensive on an absolute basis, it is reasonable relative to historical valuations, making it a potential “growth at a reasonable price” (GARP) candidate.
On the other hand, Robinhood’s stock has surged by 280% over the past year, presenting a different valuation picture. The company’s P/S ratio stands at 26.5, with its P/E ratio reaching 50.5, highlighting that investors have high expectations for future growth. However, given Robinhood’s lack of significant historical data on profitability and performance during bear markets, its elevated valuations raise caution flags. The absence of a proven track record during economic downturns could make the stock more susceptible to volatility.
With Robinhood’s current valuation suggesting that much good news is already priced in, investors may face limited room for error. In contrast, Visa’s historically grounded growth might offer more security for investors. While the allure of growth can be enticing, seasoned investors may prioritize the reliability of established companies like Visa over the potential of newer, yet untested firms such as Robinhood. This analysis leads to a cautious approach for those considering investments in these two very different financial service providers.
