Robinhood’s Credit Card Has Call Option Buyers Coming in Hot

Key Points

• Robinhood stock could be the clear winner in the financial sector in the coming months; it is an outlier next to peers like Charles Schwab. 
•  Analysts and markets are also behind Robinhood's potential rise, especially after the platform rolled out its newest retail product. 
• Call option traders stampeded to buy in, in what could be hopes of higher prices ahead. 

Discount brokerages are here to stay, and Robinhood Markets Inc. NASDAQ: HOOD is one of the few that has earned the public’s heart, not to mention its capital. The company keeps adding new features to its platform, which was once considered for amateurs only. It now competes with The Charles Schwab Co. NYSE: SCHW and others.

With the Federal Reserve (the Fed) looking to cut interest rates this year, financial stocks could soon lead the market into another leg higher. However, not all stocks in the sector are made equal. Robinhood has a unique advantage in making money from a younger, less wealthy audience, but there is a caveat.

In the United States, consumer sentiment readings have reached levels not seen since 2021. With this confidence comes new spending habits, along with looser budgets. Knowing this, Robinhood’s management rolled out the platform’s latest product: A credit card. Call option traders swept in not long after to go long on the potential upside.

Perfect Timing by Robinhood

Traders priced in these potential interest rate cuts to come in by May or June 2024, a trend investors can follow through the FedWatch tool at the CME Group Inc. NASDAQ: CME. This time window is now closing, meaning that Wall Street could be looking for the best places to rotate investment dollars.

The financial sector could be one such place, as the Financial Select Sector SPDR Fund NYSEARCA: XLF outperformed the broader S&P 500 by more than 5% over the past 6 months. Momentum favors the bold, and expectations for Robinhood’s earnings per share (EPS) remain so.

Analysts now predict that EPS could grow by as much as 30% in the next 12 months, which is above the security brokers & dealers industry average of 20%. Growing 10% faster than the industry is no small achievement for a $13.7 billion company, but it has its merits.

With strengthening consumer financing trends ahead, new sign-ups for Robinhood’s credit card may come pouring in. Because members need to have “gold” status, this also comes with a stream of recurring (subscription-based) revenue for the platform.

Wall Street Agrees, Robinhood’s a Winner

Markets are typically picky about which stocks become outliers, and Robinhood stock is one of them. From a valuation standpoint, the stock trades at a forward price-to-earnings (forward P/E) ratio of 76.8x, which is above the security brokers and dealers industry's 13.4x multiple.

Why would markets pay a 474% premium for a comparable stock? Perhaps the knowledge that a growing waitlist for the new credit card will bring EPS projections to reality.

More than that, analysts at the JMP Group LLC NYSE: JMP and KeyCorp NYSE: KEY boosted their price targets for Robinhood stock. JMP thinks Robinhood could go as high as $25 a share, calling for 30% upside from where it trades today.

KeyCorp has a similar 15% upside target on the stock, as it placed a $22 price target on it. As the stock trades at 93% of its 52-week high, investors can count Robinhood as a momentum trade.

Next to one of its biggest competitors in the discount brokerage space, Charles Schwab, Robinhood also looks like a clear winner. Because Schwab stock trades at 16.1x, a nearly 80% discount to Robinhood.

The saying “It must be expensive for a reason” applies here; one reason could be how Robinhood has adapted to the growing base of Gen-Z investors that Schwab hasn’t been able to quite capture.

Numbers Drew Traders In

Robinhood’s financials during the fourth quarter show a strong trend in the right direction. Revenues advanced by as much as 37% over the past 12 months, whereas Schwab eked out mid single-digits revenue growth in their past quarter. Fundamentally, Robinhood has the upper hand.

Another way to compare these two competitors is through how much they are trusted with or assets under management. Robinhood grew its assets under custody by 65% over the past year, a figure that does not yet reflect the potential benefits of the new retail products rolled out.

Schwab only grew its assets under custody by 20% over the year. While not a negative for the $120 billion behemoth, the growth story may be found in Robinhood instead.

All of these trends made the perfect storm for call option traders to sweep in. MarketBeat’s unusual call option scanner caught a spike in volume for Robinhood after the credit card announcement was made, implying that participants may already be behind this coming upswing.