By Steven M. Sears

Robinhood Markets just reported extraordinary growth doing something that has long eluded Wall Street: making trading, and perhaps investing, appealing to younger people.

We told you so.

Robinhood's total net revenue in the fourth quarter rose 115%, to $1.01 billion, year over year. Transaction-based revenue rose more than 200% to $672 million, reflecting cryptocurrency trading revenue of $358 million, up over 700%; options revenue of $222 million, up 83%; and equities revenue of $61 million, up 144%. Net income was $916 million, up more than 10 times from the year-ago period.

The online broker now has 25.2 million clients, up 8% since a year earlier. At the same time, expenses increased just 3% -- a strong endorsement of the company's digital structure and leadership.

Extraordinary performance, especially when coupled with strong stock gains, usually prompts seasoned investors to prepare for a sharp stock decline. In Robinhood's case, that could be a mistake. The company is growing earnings, which is a key reason to buy a stock, and management is executing well.

To be sure, Robinhood stock is up some 62% this year and more than 331% over the past 12 months, and it is trading around 39 times trailing earnings. That multiple is higher than the S&P 500 index's 28, but perhaps not obscene considering the company's recent earnings growth.

In June, when this column last endorsed Robinhood, we noted that the company's leaders were increasingly acting like seasoned financial industry executives and overcoming investor worries that they were West Coast dudes without the gravitas to conduct serious financial business. Back then, the stock was trading around $20.

Skeptics will attribute its subsequent run-up to investor enthusiasm for crypto and options, two of Robinhood's top business lines. That would be unfair. It's a considerable accomplishment that the trading platform has kept pace with surging client demand and hasn't crashed.

Management's challenge is making sure that stickier, less speculative financial products, like retirement accounts, provide a counterweight to fickle crypto and options trading. This makes Robinhood Gold -- a membership program that offers advanced market analytics, a 3% match on retirement account contributions, and higher interest rates for cash deposits -- an important metric to help evaluate the company's stability. Members pay $5 a month or $50 a year to gain access to the program.

At the end of the fourth quarter, Gold membership was 2.6 million. Any program enhancements -- perhaps additional financial benefits and a muscular investor education program -- could increase memberships and enhance earnings. In a business that struggles with customer loyalty, Robinhood seems to recognize that community is a stabilizer and revenue source that is more reliable than speculative trading flows.

To wager that Robinhood's management keeps succeeding, consider a May options trade to capture first-quarter earnings. With Robinhood stock at $60.44, investors can sell a May $55 put option for about $4.60, use the proceeds to buy the May $65 call option, and sell the May $85 call.

The cash-secured put sale positions investors to buy stock on a pullback. The call spread -- buying a call and selling another with a higher strike price but an identical expiration -- enables investors to participate in an advance. If the stock is at $85, the spread is worth a maximum profit of $20. The put sale's risk is that Robinhood's stock falls far below the strike price, which could happen if the next earnings report disappoints.

The trade anticipates that management continues to perform at a high level. and that the case for owning Robinhood's stock becomes even stronger.

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February 19, 2025 01:30 ET (06:30 GMT)

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