Why Robinhood Markets Stock Zoomed 27% Higher Last Month

Key Points

• Robinhood was added to the S&P 500 in September.

• The brokerage keeps gaining market share in the financial services space.

• Robinhood stock looks expensive right now.

• 10 stocks we like better than Robinhood Markets ›

Shares of Robinhood Markets (NASDAQ: HOOD) shot up 37% last month, according to data from S&P Global Market Intelligence. The stock trading and financial services platform was added to the S&P 500 (SNPINDEX: ^GSPC). It also keeps posting impressive growth with new customer deposits, growing trading volumes, and seeing increased penetration of its personal finance products.

Index inclusion, consistent growth

Getting included in the S&P 500 does not change anything about the underlying business of a stock. However, Wall Street tends to buy into a stock that is added to the S&P 500, on the theory that more index funds will need to allocate to the stock.

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This is what happened in September when Robinhood was officially inducted into the S&P 500. The stock soared on the announcement, leading its market cap to balloon to well over $100 billion. Shares of the stock are now up more than 10x from where it was trading back in 2023, which was less than two years ago.

Robinhood's business is chugging along, deserving some of these stock gains. It is now adding around $5 billion in monthly deposits into the Robinhood brokerage, with its total assets under custody up to $300 billion at the end of August. These are impressive gains for the once small-time brokerage for free stock and options trades.

Now, the company is turning into a full-fledged banking service with its Robinhood Gold membership. Indeed, 13% of Robinhood customers subscribe to Robinhood Gold, up from 8% in the same period a year ago. This is driving increased revenue and earnings for the business.

Image source: Getty Images.

Robinhood's demanding stock valuation

The growth in Robinhood's business has been astounding. The company keeps taking market share in stock trading, with more and more customers adopting its easy-to-use mobile application. Revenue is up over 1,000% since 2020, making Robinhood one of the fastest-growing businesses in the world.

Today, its stock trades at a market cap of $124 billion, or a price-to-earnings ratio (P/E) of 145 based on Robinhood's trailing net income. Even though Robinhood is growing quickly and now on firm financial footing, a stock trading at a P/E ratio over 100 is going to struggle to generate positive forward returns for shareholders who buy today.

Keep Robinhood on the watch list, but don't get caught up in buying this expensive stock after it has gone up 10x in the last few years.

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Brett Schafer 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.