Robinhood’s new credit card attracts call options buyers

Discount brokers are here to stay, and Robinhood Markets Inc. NASDAQ: HOOD he is one of the few who has won the hearts of the public, not to mention its capital. The company continues to add new features to its platform, which was once considered only for amateurs. Now competes with The Charles Schwab Co. NYSE:SW and other.

With the Federal Reserve (Fed) looking to cut interest rates this year, financial stocks could soon lead the market into another bull market. However, not all industry stocks are created equal. Robinhood has the unique advantage of making money from a younger, less affluent audience, but there’s a caveat.

In the United States, consumer confidence data has reached levels not seen since 2021. This confidence comes with new spending habits, along with more flexible budgets. Knowing this, Robinhood management launched the platform’s latest product: a credit card. Call options traders jumped in not long after to go long the potential upside.

Robinhood’s perfect timing

Traders have been predicting these potential interest rate cuts by May or June 2024, a trend investors can track through the FedWatch tool at the moment. CME Group Inc. NASDAQ: ECM. This window is closing, which means Wall Street may be looking for the best places to rotate investment dollars.

The financial sector could be one of these places, such as the SPDR fund for selected financial sectors NYSEARCA: XLF it has outperformed the broader S&P 500 index by more than 5% over the past 6 months. Momentum favors the bold, and Robinhood’s earnings per share (EPS) expectations remain as such.

Analysts now predict that EPS could grow as much as 30% over the next 12 months, higher than 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 Robinhood credit card signups could be coming. Since members must have “gold” status, this also leads to a recurring (subscription-based) revenue stream for the platform.

Wall Street agrees, Robinhood won

Markets are typically picky about which stocks become outliers, and Robinhood stock is one of them. From a valuation perspective, the stock is trading at a Forward Price-to-Earnings (Forward P/E) ratio of 76.8x, which is higher than the Security Brokers and Dealers industry’s multiple of 13.4x.

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

In addition to this, the analysts of the JMP Group LLC New York Stock Exchange: JMP AND KeyCorp NYSE: KEY they raised their price targets for Robinhood stock. JMP believes Robinhood could go as high as $25 per share, predicting a 30% upside from where it trades today.

KeyCorp has a similar 15% upside target on the stock, as it set a $22 price target. As shares are trading 93% of their 52-week high, investors can view Robinhood as a momentum trade.

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

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

The numbers attracted traders

Robinhood’s financial data during the fourth quarter shows a strong trend in the right direction. Revenue has increased as much as 37% over the past 12 months, while Schwab reported mid-single-digit revenue growth in the latest quarter. Basically, Robinhood has the upper hand.

Another way to compare these two competitors is to evaluate the trust they enjoy or the resources they manage. Robinhood has increased its assets under custody by 65% ​​over the past year, a figure that does not yet reflect the potential benefits of the newly launched retail products.

Schwab increased its assets under custody by just 20% over the year. While that’s not a bad thing for the $120 billion giant, the growth story can be found in Robinhood instead.

All of these trends have created the perfect storm for call options traders. MarketBeat’s unusual call options scanner detected a spike in volume for Robinhood following the credit card announcement, implying that participants may already be behind this next rally.

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