Where Will Robinhood Markets Be in 1 Year?

Robinhood Markets (NASDAQ: HOOD) has become one of the leading online stock brokerages, especially among younger investors. The company's willingness to innovate dates back to its earliest years, with commission-free trades, and continues to this day with groundbreaking ideas and features.

Wall Street has certainly taken note. Shares of Robinhood have surged by more than 400% during the past year alone.

Robinhood continues to show strong growth momentum, with users flocking to the platform and bringing more of their financial capital with them. However, there could be some clouds on the horizon.

Here is what investors need to know, and where the stock could trade in one year.

Image source: Getty Images.

Robinhood thrives on speculative investor behavior

From day one, Robinhood's business model has focused on getting its users to engage on its platform actively. That goes back to commission-free trades, which put it on the map. The idea of commission-free trades was so successful that it forced legacy brokerages to follow suit.

But companies must make money somehow, and Robinhood has occasionally gotten into hot water in this area. Most of its revenue comes from payment for order flow, fees on options contracts, and interest on margin loans.

In other words, there is a potential conflict of interest, as it has a financial incentive to encourage certain behaviors among its users that often involve increased risk-taking. Another recent and controversial example is the company's launch of a prediction (betting) platform built into the same interface where users invest and trade.

Simply buying and holding stocks or funds doesn't make Robinhood much money.

Nearing a peak in the business cycle?

By the same token, Robinhood's reliance on speculative investment behavior means its business performance can fluctuate with investor sentiment.

In 2022, when the S&P 500 index declined more than 20% from its high, the company's revenue declined similarly:

HOOD Revenue (TTM) data by YCharts; TTM = trailing 12 months.

It's pretty straightforward. Investors don't feel as emboldened to take risks when stock prices keep going down. The past few years have been a remarkable time for investors and Robinhood alike. The technology sector has soared on enthusiasm for artificial intelligence (AI), with numerous tech stocks multiplying in value in a relatively short time.

You can't time when the stock market will reverse course, but you can point out some red flags. Margin debt -- investors trading with borrowed funds -- reached record levels last month, a sign that the market's risk appetite and sentiment are overwhelmingly enthusiastic.

Meanwhile, the S&P 500 index's valuation has entered very lofty territory, at a time when the U.S. government is locked in a shutdown and consumers are visibly struggling amid ever-increasing living costs.

Where could the stock be in a year?

Robinhood has had a remarkably lucrative run for investors. However, it seems more likely that it will trade lower a year from now.

The conditions are increasingly ripe for a market downturn -- or, at the very least, a pullback in speculative behavior -- as young investors continue to feel the weight of higher living expenses, student loan payments resuming, and a souring job market that has left more than half of recent college graduates still looking for work.

Robinhood now trades at 35 times revenue, far higher than even in 2021, a market bubble fueled by zero-percent interest rates following the pandemic. Valuations are like gravity: You can fight them for a while, but eventually, gravity wins out.

That's not to say that Robinhood doesn't have a bright future. The company has clearly proved itself to be an industry disruptor, and its popularity among young investors bodes well for it as wealth transfers from older investors to millennials and Gen Zers over the next couple of decades.

But it's hard to continue buying the stock at this point. It's probably due for a good-size pullback amid this increasingly tenuous market environment.

Justin Pope 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.