Shares of Robinhood have experienced a decline of approximately 20% from their all-time highs, marking a transition into a bear market for the stock. This raises critical questions for potential investors: is now an opportune time to buy, or should they steer clear of this discount brokerage? The implications of an impending bear market must significantly influence any investment decisions.
Robinhood operates as a discount stockbroker, going head-to-head with established companies like Charles Schwab and Interactive Brokers. The firm has emerged as a major disruptor in the financial services industry, most notably championing commission-free trading, which many competitors subsequently adopted.
From its inception, Robinhood has thrived on a digital-first approach, utilizing a mobile app that features gamification elements in stock trading. The company was also quick to expand into cryptocurrency trading and has recently ventured into sports betting. While there are debates about whether sports betting constitutes a form of investing, the demand from Robinhood’s primarily younger clientele has prompted the company to include it in their offerings.
Despite the recent drop in stock price, Robinhood has delivered remarkable returns, with an approximate 1,100% increase over the past three years. However, investors should weigh some potential disadvantages before making their decision.
A primary concern is Robinhood’s valuation, which currently features a price-to-earnings (P/E) ratio nearing 50. This is considerably higher than Charles Schwab’s P/E of 24 and Interactive Brokers’ 34, indicating that Robinhood carries a higher price tag relative to its peers. When contrasted with the broader market, Robinhood’s valuation appears even more inflated, particularly against the S&P 500 index, which has a P/E ratio of around 31, and the average financial stock, sitting around 19.
Adding to the concern is the context of Robinhood’s valuation. The company exclusively became public after the market downturn experienced during the COVID-19 pandemic in 2020 and has thus only operated in a bull market. Most of its customer base, primarily younger investors, has never navigated a severe bear market akin to those seen during the Great Recession or the dot-com bubble. Historical patterns suggest that during bear markets, investors tend to panic and liquidate their investments, leading to increased trading activity. However, if the downturn proves significant and extended, it could deter Robinhood’s young clients from investing altogether—a trend that would not only shrink its customer base but could also affect the high valuation currently ascribed to the company.
Given these factors, most investors may want to reconsider their engagement with Robinhood at this time. While the company has achieved remarkable milestones, such as compelling the industry to lower trading costs, the optimistic outlook already seems baked into the stock price, even amidst its recent decline. The true test for Robinhood will likely be revealed post-bear market, suggesting that it may be wiser for potential investors to observe market trends before making a commitment to this innovative brokerage firm.
