Where Will Robinhood Stock Be in 5 Years?

Robinhood Markets has established itself as a major force in financial technology. While it has led the way in bringing modern changes to traditional financial services, it's also launched new products that come with risk; those are two sides of the same coin.

Robinhood's stock has reflected that. It has been volatile over the past few years, soaring before plunging. It's up 10% year to date. As the financial world changes, where can investors expect it to be in five years?

Running finance on the blockchain

Robinhood came to investors' attention when it launched free trades on its stock trading platform in 2013. That was a game changer for retail investors, who previously had to fork over $7 to $10 just to make a trade.

Management continues to see its mission and opportunities in democratizing finance and creating more access for retail investors. The advent of the blockchain has been a big boost for its business, and it has plans to use it for products beyond cryptocurrency trading. The Securities and Exchange Commission made headlines last week when it launched the Innovation Exemption, which allows tokenized securities to be traded through Tokenized Securities Venues such as Robinhood.

Tokenized stocks are tokens backed by a real share of stock, but the advantage of tokens is their ease of trading and the availability of platforms 24/7, rather than only during market hours. They can also be sold or exchanged for other tokens or cryptocurrencies, since they're all on the blockchain. This is the kind of marketplace Robinhood envisions and the kind of innovation it excels in.

At the same time, it's also adding more standard financial services like bank accounts and credit cards. That creates a more complete platform and adds stability to what could be a riskier set of services.

Volatile revenue streams

Revenue is growing rapidly, up 32% year over year in the second quarter. However, that's a major slowdown from earlier quarters. Cryptocurrency trading drove strong growth when Bitcoin was soaring, but it's slowed in the wake of Bitcoin's fall.

It has many eager users and continues to onboard more, but the pace is slower than I'd want to see from a young disruptor like Robinhood. Funded customers increased 7% year over year to 28.4 million, and investment accounts increased 9% to 29.9 million. Its customers are sticky, though, and it's experiencing much higher growth in its Gold Membership program, which increased 39% over last year to 4.8 million.

So where might Robinhood be in five years? As it launches new products and attracts more users, it should continue to grow at a healthy rate. However, it trades at a rich P/E ratio of 55 and a price-to-sales ratio of 23. That's a steep premium for the growth it's been demonstrating. If it continues to grow at a compound annual growth rate of 30%, in five years, it will have $18.6 billion in revenue, but that would be more than the entire online retail brokerage industry as a whole right now, so it's unlikely. If it grows at a compound annual growth rate of 15%, it would reach $10 billion, or double today's number.

At 23 times sales, the market cap would reach 230 billion, or double today's. However, it's unlikely to sustain such a high valuation, and if the price-to-sales ratio is cut in half to 11, the market cap would be exactly the same as today's.