This Cathie Wood Stock Has More Than Doubled This Year, and It's Not Too Late to Buy

Key Points

• Robinhood has been soaring during the past year due to strong financial results.

• The company has a growing list of products and an expanding ecosystem.

• Valuation is a concern, but Robinhood could still beat the market over the long run.

• 10 stocks we like better than Robinhood Markets ›

Cathie Wood is a famous name on Wall Street and the chief executive officerof Ark Invest, an investment management firm with a particular focus on disruptive innovation. One company that Wood and her team have been bullish on for a while is Robinhood Markets (NASDAQ: HOOD), a stock trading app. Ark Invest first bought shares of Robinhood in 2021, and although it faced significant volatility at the time, things have improved significantly since then. Robinhood's shares have skyrocketed by almost 500% during the past year, but there might still be plenty of upside left for long-term investors. Here's what investors need to know.

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Why Robinhood is flying high

While Robinhood's performance during the past year might seem surprising -- and perhaps unwarranted -- it's important to point out that the company faced some challenges back in 2021 for its role in the meme stock phenomenon. Many critics argued that the company's gamified trading platform made it easy for inexperienced investors to engage in high-risk trades. Robinhood also had to deal with a regulatory probe regarding some of its practices. On top of all that, Robinhood still wasn't profitable. All that has changed.

During the past few years, Robinhood has established itself as a serious financial services provider. Consider the company's second quarter update. Robinhood's revenue increased by 45% year over year to $989 million. Most of Robinhood's key metrics moved in the right direction during the period, including total platform assets, net deposits, and subscribers to the company's Gold premium option, as well as average revenue per user. And on the bottom line, Robinhood's net income more than doubled to $386 million. Robinhood has been routinely posting results of this kind during the past few quarters. That's why the stock has soared as much as it has.

Think long-term

Following its success over the past year, Robinhood's shares appear expensive, to say the least. The company's forward price-to-earnings ratio is well above the average for financial stocks of 16.3, while its forward price-to-sales ratio is significantly higher than the undervalued range of 2 and below.

HOOD PE Ratio (Forward) data by YCharts

Can the stock still have some upside at these levels? In my view, there is a good chance of a pullback. However, for those willing to hold onto the stock for more than five years, there could still be significant upside. First, high-growth companies often command steep premiums, especially when they are profitable, as is the case with Robinhood. Second, Robinhood's long-term prospects appear attractive. One key reason Robinhood's outlook is bright is its popularity among younger generations.

The criticism that the company offers a gamified platform is, in a way, a compliment in disguise. That's precisely the sort of platform younger people growing up in our digital age are accustomed to. Robinhood has other attractive features. The company is a pioneer of the commission-free trading model. Thanks to these two factors, investing in stocks (and cryptocurrency) has become more mainstream among younger generations. Furthermore, the company has introduced numerous other offerings that have also gained popularity among its users.

Robinhood offers retirement accounts, lending products, a sophisticated platform for active traders, a debit card for its Gold premium subscribers, and more. Robinhood is also expanding internationally with operations in the U.K. As the trading app of the future, it offers a range of additional products and competes with traditional banks and other financial services providers on many levels, all on a slick platform that has become the norm in today's digital age.

Over the long run, the company should benefit from increased user activity as younger people enter the workforce, offering more products, and its international expansion efforts. It's impossible to predict how the stock will perform in the next year. It could go either way. However, Robinhood could deliver solid returns to investors who stay the course even amid dips and volatility.

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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.