Robinhood and Interactive Brokers Stock Might Be Too Hot to Touch

Robinhood stock has soared nearly 200% so far this year. (Lionel Bonaventure / AFP / Getty Images)

Brokerage stocks like Robinhood and Interactive Brokers have been riding high, thanks to this year’s stock market gains. If the bull market continues, they could continue to rally. That, however, is a big ‘if.’

Shares of Robinhood Markets have been on fire lately, surging to more than $108 from under $40 at the start of the year. It isn’t hard to see why: The company delivered a blowout earnings report last month, handily beating Wall Street’s profit and revenue forecasts. Options trading and margin loans were both big growth areas, while crypto trading revenue nearly doubled to $160 million.

Interactive Brokers stock has also posted big gains—if not quite as dramatic—of 43% so far this year. The company said its number of customer accounts climbed nearly by nearly a third in its last quarter.

These stocks could have room to rally, despite sharply higher valuations, according to a note Monday from Goldman Sachs .

Robinhood now trades at 65 times forward earnings, while Interactive Brokers trades at 31 times, according to FactSet. To put that in context, the average multiple for stocks in the Financial Select Sector SPDR , an ETF that tracks the industry, is just 17 times.

While the Goldman analysts acknowledge that such high valuations could be limiting, they say revenue and earnings are the bigger drivers for these stocks.

“We see a strong trading backdrop supportive of HOOD and IBKR commissions, margin lending income, and securities lending,” the analyst team led by James Yaro wrote, citing the company’s ticker symbols.

Goldman, which ranks both stocks as buys, says its bullish forecast is based on four factors: Trading activity remains below the peak it hit in 2021, before the 2022 bear market; that activity is even further below those peak levels if you consider these companies’ much larger 2025 customer bases; margin loans’ profits are likely to remain strong as long as markets do; and finally, Goldman sees U.S. stocks climbing 8% in the next 12 months.

Goldman’s analysis is fine as far as it goes. But there’s a lot riding on the last factor—the premise that the stock market will post healthy gains over the coming year.

Investors have already started to worry about a disconnect between the ever higher drift of the S&P 500 and softening economic data, like recent jobs and manufacturing data.

So far, the market has shrugged off all the bad news. And Goldman’s stock forecast may be right. But if not, Robinhood and Interactive Brokers—and investors—could be in for serious pain.

History shows us what that could look like. Shares of Robinhood started trading in July 2021, near the height of the Covid bull market and that era’s crypto craze. When the excitement faded the next year, the shares collapsed, falling from a 2021 high of around $44 to a low of around $8 in 2022. The shares didn’t regain that old $44 threshold until earlier this year.

Interactive Brokers shareholders’ ride followed a similar, though milder, trajectory, falling from just under $20 in late 2021 to around $14 at the peak of the 2022 selloff.

The bottom line: Stocks that thrive on stock trading amount to a leveraged, or amplified, bet on the market itself. That looks pretty dangerous in the current climate, with the stock rally drawing comparisons to the 1990s dot-com bubble.

Could investors that own these stocks see more gains in the next six or 12 months? Sure, but they are picnicking at the foot of a volcano.

Write to Ian Salisbury at ian.salisbury@barrons.com