Idea Roundup #6: Is Robinhood... a deal right now?
A quick look at a few interesting ideas from this week.
Thanks for reading this week’s Idea Roundup, published each Thursday. My next equity deep dive will be published next week, so be on the lookout! Lastly, be sure to read the disclaimer at the end of the post. Enjoy!
1. Robinhood Markets, Inc (HOOD) HOOD 0.00%↑
There are some stocks out there that create knee-jerk emotional reactions in investors. After the Reddit-fueled meme-stock frenzy that propelled AMC AMC 0.00%↑ and GameStop GME 0.00%↑ to stratospheric heights, Robinhood gained notoriety as the go-to platform for gambling YOLOers willing to throw their life savings away on a single call or put. Oh, and the company has had regulatory problems in the past, as well.
If all of this creates a bit of a knot in your stomach at the idea of owning this company… well, that’s understandable. But there are signs that things may be turning around. A recent research piece from Gator Capital Management explains the hedge fund’s outlook on their newly acquired shares in Robinhood:
Here was our investment thesis when we purchased Robinhood in November 2023:
Robinhood was trading at $8.07, and its tangible book value was $7.92. This valued Robinhood at just above 1.0x book value. We felt this valuation provided a good amount of downside protection. In fact, Robinhood has been buying back its shares in recent quarters because of the low price. Robinhood is marginally profitable, and we do not see book value declining except in severe market scenarios.
Robinhood is growing accounts and consistently attracting new net assets from customers onto its platform on a monthly basis. Robinhood adds about 30,000 new accounts per month and attracts over $1.0 billion of customer inflows per month. At this rate of customer inflows, Robinhood is growing at an 18% per year rate without considering market appreciation from their customers’ investments.
Robinhood has better positioning as a customer advocate than industry leader Schwab [ SCHW 0.00%↑ ] . Although Schwab has a great franchise and large market share, we think the company has wrecked its business model in the name of imitating Robinhood. When Robinhood was launched, the company’s innovation was free stock trading. Schwab copied Robinhood’s free stock trading model. Schwab’s move caused Ameritrade’s management to panic and agree to an acquisition by Schwab. Schwab’s management team thought they could make up for the lack of stock commission revenue by forcing their customers into holding their excess cash in Schwab’s affiliated bank and paying an unreasonably low interest rate on this excess cash. The table below shows the interest rates major brokerages pay their customers on excess cash.
I’ve omitted the table, but you can see it by going to the link above (definitely worth a click).
For what it’s worth, the company has appreciated a bit from Gator’s buy-in price of $8.07 (today it trades in the $11-$12 range), and it’s reasonable to wonder if the opportunity has passed, but the price to tangible book value of the stock remains well below others in the industry.
As of this writing Robinhood currently trades at 1.6x P/TBV, compared with 3x for Interactive Brokers IBKR 0.00%↑ and Schwab’s 13.9x.
2. Datadog, Inc (DDOG) DDOG 0.00%↑
Datadog found itself in the doghouse (see what I did there) with investors on February 13th when it posted earnings. Revenue of $589 million—an increase of 26% over the prior year—wasn’t enough to satisfy the Street, even though that figure came in well above the average analyst estimate for $568 million for Q4.
Ironically, it seems that Datadog’s growth is exactly what has investors spooked—the question of whether or not the stellar numbers can continue ad infinitum looms large.
This, of course, is the live-by-the-sword-die-by-the-sword logic that accompanies growth investing—growth today is great, but what you’re paying for is growth in the future. Still, the drop in the stock’s price on this news seems… overdone? In its press release, the company guided for FY2024 revenues of $2.555 billion to $2.575 billion. This is a near 20% increase year-over-year from FY2023’s revenues of $2.13 billion.
Let’s take a quick moment to ponder the absurdity of this. If, say, Kraft Heinz KHC 0.00%↑ were to announce this growth target for the upcoming FY, the stock would go to the moon. But in the high-flying world of tech, 20% growth projections can seem downright disappointing. C’est la vie.
Of course, this kind of reaction usually only comes when valuations are stretched, and at 76x forward earnings and 70x EV/EBITDA, Datadog doesn’t look cheap (even though those metrics have cratered from the mid-300x range and beyond in the last three years).
At this point I think investors have a question to ask themselves: is the greenfield in front of DataDog (and other growth stocks) so plentiful in a higher interest rate environment to make these premium valuations worth it?
3. Albermarle (ALB) ALB 0.00%↑
Long-time readers will know what saying is coming: you can have great prices or great news, but not both. In the case of lithium producer Albermarle, it would appear that the pendulum has finally swung back toward good prices.
After an impressive run that began in 2020 with a low of around $50 and didn’t peter out until the end of 2022 when the stock briefly breached the $300 mark, the stock today is flirting with the idea of dropping out of the triple-digits altogether (with the exception of a small bump to end 2023, the stock trades around $125 as of this writing), representing a 61% drawdown from the stock’s 2022 peak.
The 2020 hype around Albermarle was simple enough to understand:
Electric vehicles will be the way of the future.
Electric vehicles need lithium for their batteries.
Albermarle is one of the few major American lithium producers.
The hype, however, has generally faded. While it is far from certain that the EV movement is dead in the water, demand has certainly slowed. As early as December last year, Ford F 0.00%↑ announced it would cut back on planned production of its electric F-150, and just this month the company announced that its EV sales had fallen 11% in January 2024. Not even Tesla TSLA 0.00%↑ has been immune—Elon Musk’s company is down after disappointing earnings and a conference call where executives declined to comment on 2024 production and delivery numbers.
So, there you have it: bad news and a declining stock price, which, for some investors, is good.
Albermarle’s once-tech-like valuation has also fallen to Earth since the hype melted away. Today the stock trades at a fairly reasonable 22x earnings.
Another running theme of this newsletter, however, is the fact that human nature tends to extrapolate today’s conditions ad infinitum into the future. In other words, if things are bad today we are more likely to believe they will be bad in the future. Very often, however, this is not so. The long-term demand profile for electric vehicles is still—despite these bumps in the road—quite robust.
Additionally, some companies (like Boeing BA 0.00%↑, for example), enjoy a somewhat politically privileged place. American politicians on both sides of the aisle generally view China’s role in the world as the largest producer of lithium with a wary eye, making Albermarle’s business a potential beneficiary of tariffs or legislation that favors American-produced lithium in the future.
Of course, there are major risks—the actual production of the elusive solid-state battery would likely be devastating for Albermarle’s business, and even outside the realm of the hypothetical, the very real adoption of smaller cars with smaller batteries also poses a risk.
4. Super Micro Computer (SMCI) SMCI 0.00%↑
I first wrote about Super Micro way back in February 2023 over at Seeking Alpha. At the time, I thought the stock was well-positioned to perform nicely in 2023 and beyond. I had no idea that the stock would surge almost 900% from there.
Today, things are no longer so clear. Super Micro is well-known, and the valuation is stretched considerably. While readers might protest against this idea (after all, the stock today only trades at 32x earnings—practically a bargain in the tech world!), they would also do well to remember that in February 2023 the stock’s valuation was laughable, trading at only ~10x forward earnings estimates.
Could Super Micro expand further? Of course. Its business is certainly top-tier and management has performed exceptionally well. But even a good thing can go south when… a certain mania takes over. In the last three months alone, for example, the stock has surged 200%. It’s not uncommon for the stock to endure daily double-digit-percentage price swings.
In other words, Super Micro is, as the pros say, frothy.
So, what to do? Some investors, of course, will look at a chart like Super Micro’s and think oh my god I’m missing out, while others will think I’m not touching that thing with a ten-foot pole. When a stock trades as wildly as this, guttural reactions are generally the norm. Of course, sitting on your hands is a perfectly fine option as well.
At the end of the day, however, Super Mirco runs a fantastic business that has performed beyond the wildest expectations even of people who have watched it for a long time. It may be the case that the rocket fuel that propels the stock may not have run out, but in any case, caveat emptor—buyer beware.
Final Thoughts…
Hold up… the Fed might not cut rates (David Einhorn seems to agree). The decades-long national debt conversation is heating up. Sam Altman is looking to raise a lot of money for AI chips. I mean, you gotta compensate for inflation: Goldman CEO gets a 24% raise to $31 million annually. The Temu ads are getting out of hand. Nike cuts jobs; stock falls anyway. Move over, Taiwan: Japan’s semiconductor business is booming.
Disclaimer: The content in this article is for informational, educational, and entertainment purposes only. This content is not investment advice and individuals should conduct their own due diligence before investing. The author is not suggesting any investment recommendations—buy, sell, or otherwise. This article is not an investment research report but a reflection of the author’s opinion and own investment decisions based on the author’s best judgement at the time of writing and are subject to change without notice. The author does not provide personal or individualized investment advice or information tailored to the needs of any particular reader. Readers are responsible for their own investment decisions and should consult with their financial advisor before making any investment decisions. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned. Any projections, market outlooks, or estimates herein are forward looking statements based upon certain assumptions that should not be construed as indicative of actual events that will occur. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. The author expressly disclaims all liability for errors and omissions in the service and for the use or interpretation by others of information contained herein.
Interesting case for HOOD. I have a small position in SCHW (Schwab stock) and have 7 figures in my accounts with Schwab.
I don't know how that research firm can come to the conclusion that HOOD has better branding as a customer advocate. The two things I know (still an opinion statement) about HOOD are that they disguised commissions in order execution and they took actions that I consider market manipulation. In my opinion, their executives should be sitting in small cells and banned from the industry for life.
I suppose there is one more thing. They took those actions to move market prices specifically to disadvantage their own retail clients for the benefit of a hedge fund. That's my opinion on it. I can't say it as a fact because of our legal system, but it sure looked way to me.
On the other hand, Schwab's service is so good that I contact them to ask if they can provide other services for me. I am happy to do business through Schwab. When their stock plunged on the regional bank crisis, I threw some cash in. One reason was because they looked cheap, but another was because I was fighting against the shorts that wanted to create the panic to create a bank failure.
I'm not a fan of Schwab ending Street Smart Edge, but I like everything else about them.
When someone says they are opening an account at HOOD my gut response is simply: "You stupid?"
Note: I haven't owned any of the meme stocks. I just don't care for crappy businesses that fight against their own customers.