The Newest Stock in the S&P 500 Has Soared 237% Since Its 2021 IPO, and It's a Buy Right Now, According to Wall Street

The S&P 500 (^GSPC -0.05%) is widely accepted as the most comprehensive benchmark of the U.S. stock market, made up of the 500 leading publicly traded companies in the nation. Given the extensive reach of the businesses that make the index, it is regarded as the most reliable measure of overall stock market performance. To be granted admission to the S&P 500, a company must meet the following conditions:

• Be a U.S.-based company
• Have a market cap of at least $22.7 billion
• Be highly liquid
• Have at least 50% of its outstanding shares available for trading
• Must be profitable based on generally accepted accounting principles (GAAP) in the most recent quarter
• Must be profitable over the preceding four quarters combined

Robinhood Markets (HOOD -2.29%) is the latest addition to the S&P 500, scheduled to join the benchmark on Sept. 22. That makes it one of only 10 companies to be granted admission so far this year.

Since its initial public offering (IPO) in mid-2021, Robinhood has soundly thrashed the broader market, generating gains of 237%, compared to just 48% for the S&P 500 (as of this writing). The stock price gains have been fueled by its strong underlying fundamentals, as revenue has jumped 169% and net income has risen 1,440% — despite struggling profits during the COVID-19 pandemic.

Yet, despite the stock’s robust gains and the company’s accelerating track record of growth, many believe the runway ahead is long for Robinhood. Let’s view the opportunity ahead and dig into why Wall Street considers the stock a buy, despite its seemingly premium valuation.

Taking stock

Investing was once the domain of the rich and famous, but over the past few decades, retail investors have come into their own. Stocks no longer trade in blocks of 100, commissions on trades have largely vanished, and investing platforms are easily accessible to anyone with an internet connection.

That’s where Robinhood comes in. The company was founded on the idea that “everyone should be welcome to participate in our financial system.” The platform’s digitally native design, ease of use, and near-universal accessibility have fueled Robinhood’s quick ascent, as the company now commands roughly 6.5% of the overall market, according to CSI Market, despite competition from larger, well-heeled rivals.

Robinhood has laid out a three-pronged strategy for driving growth. The company’s trading platform covers equities, options, cryptocurrency, prediction markets, index options, and futures trading, thereby attracting active traders. It’s also focused on earning more of each user’s wallet share. Finally, Robinhood is expanding the breadth of its financial ecosystem, adding new features, products, and services.

The numbers tell the tale

Robinhood’s most recent results suggest this strategy is paying off. In the second quarter, revenue grew 45% year over year to $989 million, resulting in a 100% surge in earnings per share (EPS) to $0.42.

The results were driven higher by transaction-based revenue that jumped 65% to $539 million, fueling average revenue per user (ARPU) that increased 34% to $151.

Underpinning the financial results were equally robust operational metrics:

• Robinhood’s funded customer base increased to 26.5 million, up 10% year over year.
• Subscribers to Robinhood Gold, its premium tier, soared 76%.
• Total platform assets reached $279 billion, a 99% surge.
• Net deposits of $13.8 billion climbed 4%.

The success of software-as-a-service (SaaS) companies — including Robinhood — is often measured using the Rule of 40, which gauges the balance between revenue growth and profitability. Any number above 40% is considered healthy, so Robinhood’s score of 112% is excellent.

The fintech company continues to expand its financial services offerings, as well as its geographical footprint, which helps to highlight the reach of Robinhood’s future growth opportunities.

Wall Street is bullish

Robinhood stock has surged 497% over the past year, but Wall Street remains bullish. Of the 23 analysts that covered the stock thus far in September, 14 rate it a buy or strong buy, 7 label it a hold, and two hold a rating of underperform.

Bernstein analyst Gautam Chhugani is among the most bullish, maintaining a buy rating and $160 price target on the stock, which suggests additional upside of 36% for investors, compared to the stock’s closing price on Wednesday.

The analyst says the company has built the best “mousetrap” with its trading business and is “building the most evolved multi-asset financial super-app, leveraging technology.” The analyst goes on to say that he believes Robinhood will evolve into a financial services leader for the “new generation.”

Robinhood stock appears exorbitantly expensive at first glance, selling for 55 times next year’s earnings and 22 times next year’s sales. This helps to illustrate a common conundrum, as the most commonly used valuation metrics struggle to adequately value high-growth companies, and Robinhood is no different. However, when measured using the more appropriate price/earnings-to-growth (PEG) ratio, the multiple comes in at 0.34, and any number less than 1 is the standard for an undervalued stock.

Given its three-pronged growth strategy, strong execution, and Wall Street’s bullish take, I would submit that Robinhood stock is a buy ahead of its admission to the S&P 500.