Robinhood

Robinhood posted solid second-quarter earnings, although the shares were down 2%-3% initially in July 29 aftermarket trading. The firm's $1.31 billion in net revenue represented 32% annual growth, while its $0.48 in diluted EPS, adjusted for a one-time gain, was up a healthy 13%.

Why it matters: Robinhood maintains its dizzying pace of innovation, and we were encouraged by results in what we consider its key metrics—record customer net deposits of $22 billion (reflective of 28% annualized growth), 32% growth in client assets to $369 billion, and $156 million in prediction markets revenue. All comfortably outpaced our expectations. The firm's product suite continues to resonate with its core clientele, and while there remains a long-term debate as to how well Robinhood will be able to retain customers as their wealth grows and their financial needs evolve—the average customer still holds just $13,200 in assets with the firm—we envision a route to more than $2.2 trillion in platform assets in a decade, reflective of 21% annualized growth between 2025 and 2035.

The bottom line: As we digest narrow-moat Robinhood's second quarter, we plan to raise our $52 per share fair value estimate by a high-single-digit percentage, reflective of strong market performance, better-than-expected transaction activity outside of cryptocurrency, and record net inflows. We think the shares look expensive, though, despite what we believe is a pretty sanguine outlook for 10-year compound annual growth of 14%, 17%, and 19%, respectively, in revenue, operating profit, and diluted EPS. Market prices imply stronger growth than this, which we view as unlikely, considering both a stout competitive landscape and our view that retail trading volume and risk appetite are cyclically high, suggesting the firm is outearning what we might consider "normalized" revenue. To this effect, average revenue per user swelled 24% to $187 during the quarter on the back of higher transaction activity.

Prediction markets were an intriguing bright spot, with second-quarter revenue of $156 million growing by a factor of more than 14 times relative to the year-ago period. In June, the firm launched its own prediction market exchange, now the third-largest exchange by volume (to better-known Kalshi and Polymarket), in conjunction with trading firm Susquehanna and the Miami Stock Exchange.

Revenue for this product is a significant source of both uncertainty and of potential growth. Over the decade to come, we expect that revenue pool to grow by a factor of 4 times from already strong 2026 levels, roughly doubling the revenue we expect from the firm's mainstay options trading business by 2035.

It's also entirely possible that the business largely dries up, with some evidence that current use skews heavily toward sports contracts (nearly 90%, by some estimates) for Robinhood customers and that a large chunk of that volume is concentrated, industrywide, in states that have not legalized online sports betting. While the current regulatory climate may be amenable to more lenient US Commodity Futures Trading Commission regulation and eschewing state-level licensing, there is no guarantee that this equilibrium will persist.

Based on the $16 million in minority income that the firm booked during its second quarter, we posit that the joint venture is already quite profitable, perhaps even approaching the levels that we see at mature exchanges. Concomitant with this discussion, it feels as appropriate a time as any to reiterate our Very High Morningstar Uncertainty Rating for Robinhood.

The business remains strong, but with the breadth of its ventures, it's unclear which of the firm's ambitious initiatives will pay off in the long run. Even with very constructive assumptions regarding prediction markets, the Robinhood credit card, and the core brokerage business, we struggle to rationalize current market valuations, with shares trading at a roughly 55% discount to our revised valuation.

After digesting the firm's second-quarter 2026 results, we've raised our fair value estimate for Robinhood to $57 from $52, reflecting strong market performance, better-than-expected noncrypto transaction activity, and record net inflows. We've raised our 10-year compound annual revenue and EPS growth expectations by 100 and 200 basis points, respectively, driven by an uptick in near-term client deposit gathering, stronger growth in the consumer credit card business, and robust initial profitability from prediction markets. Our revised valuation implies a 2026 price/earnings of 27 times.

Longer term, consistent with retail brokerage peers, Robinhood's business model is sensitive to transactional activity, transaction fees and spread rates, customer borrowing appetite, interest rates, organic asset growth, and market returns.

Catering to a young, risk-seeking clientele, Robinhood has carved out what appears to be a durable position in the attractive US brokerage landscape. Its growth runway looks enviable, with our projected 29% and 21% compound annual growth in average client assets over the next five and 10 years, respectively, driven by the growing wealth of Robinhood's young customer base and commensurately higher adoption of the firm's growing suite of traditional financial services products. To this effect, the lion's share of our projected client asset growth is driven by net deposit growth of 20% and 14% over those respective time horizons as Robinhood customers consolidate a larger share of their financial lives with the broker (the difference is driven by market returns and leverage). This results in projected average client assets of $2.2 trillion by 2035, a significant step-up from $258 billion in 2025 but a bit behind the $3.1 trillion we forecast for Interactive Brokers and a far cry from the $29.1 trillion we pencil in for industry-leader Schwab (split across its retail brokerage and RIA businesses).

While we expect pressure in a few of the firm's key markets, particularly equity and options trading, which appear to be operating near cyclical peaks (the former is also dealing with regulatory pressures) we expect robust growth in prediction markets and net interest income to drive a solid long-term growth road map for the brokerage operator. Overall, we expect 8% compound annual growth in transaction-based revenue, buoyed by 25% growth in "other" transaction-based revenue, which includes prediction markets. Elsewhere, we expect 20% growth in net interest income, with the drag from projected flat net interest margins offset by robust projected growth in interest-earning assets. Married with a highly scalable business model—the firm highlights that 85% to 90% of its operating costs are fixed—we expect high incremental margins on forecast growth, driving modest margin expansion through our explicit forecast period.

Revenue from prediction markets is both a significant source of uncertainty and a significant source of potential growth. Over the decade to come, we expect that revenue pool to grow by a factor of 4 times from strong 2026 levels, roughly double what we expect the firm to earn from options trading during that year. However, it's entirely possible that the business largely dries up, given evidence that current use skews heavily toward sports contracts (nearly 90%, by some estimates) for Robinhood customers and that a large chunk of that volume is concentrated, industrywide, in states that have not legalized online sports betting. While the current regulatory climate is amenable to more lenient US Commodity Futures Trading Commission regulation and eschewing state-level licensing, there is no guarantee that this equilibrium will persist.

Altogether, our forecasts for the firm, on a consolidated basis, anticipate 10-year compound annual growth rates of 14.1%, 16.8%, and 19.1% in revenue, operating income, and diluted EPS, respectively.

We believe that Robinhood has carved out a defensible competitive advantage rooted in intangible assets, which we expect to persist for the 10-year narrow economic moat horizon. This view is embodied by estimated returns on invested capital of 31.1% between 2026 and 2030 and corroborated by 28.7% estimated returns on invested capital in 2024-25, the firm’s first full years of operating profitability.

Our argument for Robinhood’s economic moat is somewhat unconventional. Typically, retail brokerage firms in our coverage carve out economic moats around cost advantages, leveraging scale or superior technology prowess to deliver a competitive user experience at a lower cost than smaller peers.

Our argument for Robinhood, by contrast, is centered around the reputation that the firm has developed among younger, mobile-first consumers that had been largely underserved by its larger peers given their small account sizes and their preferences for trading in esoteric asset classes and with mobile devices that would have necessitated costly infrastructure investments for incumbents to service. Not altogether unlike narrow-moat DoorDash’s efforts to undercut incumbent Grubhub by onboarding demand in the under-tapped suburban markets, Robinhood was able to build a platform that has achieved critical mass by targeting an underserved market niche in young, active traders with limited wealth. To do so, it adopted a technology-first approach, offered its services at a steep discount to competitors’ sticker prices—although it more than made up for this on no-commission monetization like payment for order flow—and built a brand reputation around the perception that it was taking trading commissions from the rich and distributing the proceeds to its own customers. While this view is perhaps factually inaccurate, it has proven sufficient to engender a degree of brand power that is relatively unparalleled in the financial-services industry.

Investors tend to consider brand strength across two vectors: the ability to confer trust and attract volume to a greater extent than peers (in value-oriented purchase occasions) and the ability to extract economic rents by charging higher prices than competitors for effectively identical products. We believe that Robinhood predominately exhibits the former, with its reputation for democratizing access to financial services and for providing fairly priced, free or low-cost trading and margin access to its users attracting a lucrative, risk-seeking clientele that generated industry-leading revenue per dollar of client assets of 174 basis points in 2025, underpinned by unusually high levels of trading activity in more profitable options, cryptocurrency, and prediction markets categories. As we see it, the firm’s brand strength is also evidenced by its industry-leading levels of client deposit growth, indicative of strong customer acquisition and/or customer willingness to consolidate their financial lives with Robinhood. Our argument, at its core, is that the trust brokered by Robinhood’s brand with its core customer base earns it the first crack at serving those users’ evolving financial needs as they mature, allowing the firm to credibly roll out new products across its 27 million member distribution channel with a reasonable chance of achieving success.

We also see traces of the firm’s brand strength in its strong returns on advertising spending, with our estimates suggesting that the financial services provider averaged an outstanding customer lifetime value to acquisition cost of 17 times between 2021 and 2025, with acquisition costs averaging just $160 per account over that period, and with payback periods averaging just nine months. Importantly, and consistent with brand moat frameworks elsewhere in our Morningstar coverage, Robinhood continues to invest heavily to defend this position, funneling a striking 8.9% of revenue toward marketing investments in 2025, compared with an estimated 2.0% and 1.3% at Charles Schwab and Interactive Brokers, respectively, while allocating another 20% of revenue toward platform development. We believe that the firm is investing sufficiently to defend its brand through the narrow-moat investment horizon.

As it pertains to cost advantage, the typical moat source in the brokerage industry, we’re not ready to assert that Robinhood has carved out an edge, given the high fixed-cost nature of the brokerage business and the firm’s significantly smaller asset base than peers. We estimate that Robinhood posted a 0.92% expense on client assets ratio in 2025, substantially worse than 0.12% at Schwab and 0.21% at Interactive Brokers, if leaps and bounds better than the 4.29% EOCA it posted as recently as 2021. It’s possible that we change this tune over time, however, as believe that the firm operates with a less labor-intensive cost structure than the larger incumbents, with $1.7 million in revenue per employee compared with $724,000 at Schwab and $483,000 at Fidelity in 2025.

Overall, it seems that the current structure of the retail brokerage industry should allow for the presence of multiple competitively advantaged players, a view corroborated by compelling return profiles at Schwab, Interactive Brokers, and Robinhood already despite significantly different operating models and customer profiles. In our view, the customer overlap between those groups remains manageable, with Robinhood focusing on young, active traders with high risk tolerance and high sensitivity to product breadth, low explicit trading costs, and novelty, with Schwab focusing on higher-value clients that might be more execution-price sensitive, may utilize the firm for its first-party asset management products, wealth management, retirement solutions, or even borrowing, and with Interactive Brokers focusing on an active and institutional or international clientele that is fixated on trading functionality, execution cost, and product access at the expense of all else.

Robinhood could be one of the largest beneficiaries of a significant anticipated intergenerational wealth transfer in the US, with a median customer age of just 35 years old.

Widespread adoption of tokenized assets could benefit Robinhood as one of the early movers in the space.

With a significant fixed-cost base, Robinhood could grow even more profitable over time if it can successfully execute its ambitious product road map.

The firm might struggle to retain users as they age, given that Robinhood is the first brokerage for more than one half of its customers.

If Robinhood's core user base is largely saturated, marketing programs like the firm's IRA match may simply be "renting" customers, driving deteriorating marketing returns over time in a competitive industry.

Consistent client underperformance relative to market benchmarks could encourage less active and less lucrative investing behavior.