What Happened:
Shares of financial services company Robinhood (NASDAQ:HOOD) jumped 5.2% in the afternoon session after markets rebounded (Nasdaq up 1.8%, S&P 500 up 0.8%) after shaking off the initial negative reaction to the August inflation report by the Bureau of Labor Statistics. The report revealed that CPI (Consumer Price Index - a gauge of the average price consumers pay for goods and services) for the month of August 2024 came in line with expectations, growing 0.2% month on month.
A concerning aspect of the report lies in the core CPI (which excludes food and energy prices), which revealed a 0.3% increase from the previous month, slightly exceeding the expected 0.2%. Despite this, annual inflation seemed to be easing, rising by 2.5%, the lowest level since February 2021. The improved market sentiment suggests investors still very strongly believe that the Fed will cut rates later this month.
As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. The result of lower interest rates, all else equal, is higher stock valuations. This is especially true for higher-growth stocks such as those in the technology sector, where the current value depends more on cash flows many years out in the future.
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What is the market telling us:
Robinhood’s shares are somewhat volatile and over the last year have had 27 moves greater than 5%. In context of that, today’s move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 6 months ago, when the stock gained 13.3% after the company provided its February operating data reflecting strong asset growth and higher trading volumes. Although its funded customers were only up by 130k compared to the previous month (23.6 million total), its Assets Under Custody (AUC) rose to $118.7 billion, representing a 16% month-on-month increase. This was driven by growing momentum in the public markets, which led to higher stock and cryptocurrency prices, and new inflows from existing customers into Robinhood's retirement products, which are offering customers a 3% match on any contributions.
As a result, it wasn't surprising that volumes were up across all asset classes compared to the previous month. Notably, equity trading volumes were $80.9 billion (up 36% m/m), while crypto trading volumes were $6.5 billion (up 10% m/m). Given the increased platform activities, Securities Lending Revenue also benefitted and came in at $13 million, up 8%. Overall, the data showed Robinhood is performing well in the near term.
Robinhood is up 67.1% since the beginning of the year, but at $20.67 per share it is still trading 16.1% below its 52-week high of $24.63 from July 2024. Investors who bought $1,000 worth of Robinhood’s shares at the IPO in July 2021 would now be looking at an investment worth $593.62.
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