HOOD vs. SCHW: Which Brokerage Stock Is Better?

In this piece, I evaluated two brokerage stocks, Robinhood Markets (NASDAQ:HOOD) and Charles Schwab (NYSE:SCHW), using TipRanks’ comparison tool below to see which is better. A closer look suggests a bearish rating for Robinhood and a neutral rating for Schwab.

Robinhood Markets operates a proprietary financial services platform that supports the trading of stocks, including fractional shares and cryptocurrencies. The platform also allows for other financial services like dividend reinvestments and access to initial public offerings.

Meanwhile, Charles Schwab is a savings-and-loan holding company that provides wealth management, securities brokerage, banking, asset management, custody, and financial advisory services.

Shares of Robinhood Markets have soared 51% year-to-date and are up 97% over the last year, while Charles Schwab stock is up a much more modest 4% year-to-date and has gained 48% over the last year.

With HOOD stock up much more than SCHW stock, it’s no surprise that there’s a sizable gap between their valuations. Although Robinhood management said in their fourth-quarter earnings release that they expect 2024 to be the first year of annual profitability, the company isn’t currently profitable.

Thus, we’ll compare the two companies’ price-to-sales (P/S) ratios to gauge their valuations against each other and that of their industry. We’ll also look at Schwab’s price-to-earnings (P/E) ratio. For comparison, the diversified financial industry is trading at a P/E of 17.1x versus its three-year average of 30.8x and a P/S of 3.8 versus its three-year average P/S of 2.7x.

Robinhood Markets (NASDAQ:HOOD)

At a P/S of 8.7x, Robinhood Markets is trading at a massive premium versus its industry and Schwab. With the stock right around overbought territory on a weekly time frame, a large volume of insider sales, and significant selling by a high-profile bull, a bearish view seems appropriate for now.

First, while Robinhood stock is up 106% over the last year, the majority of that rise has come since early February, with the stock skyrocketing from around $11 per share to nearly $20 in about two months. That rocket-ship ride initially lifted the shares into overbought territory. However, with the price coming down in the past few days, Robinhood’s relative strength index has retreated slightly, now just above 70 (with >70 being the threshold for overbought territory).

The recent fall calls attention to some signs of profit-taking in Robinhood stock. Longtime cryptocurrency bull Cathie Wood recently started dumping large volumes of Robinhood stock through her firm ARK Invest. On March 25, the firm unloaded 1.6 million shares from three funds, according to trade notifications.

Of that total, 1.25 million shares came from the ARK Innovation ETF (NYSEARCA:ARKK). This latest sale is the largest since the firm started loading up on Robinhood shares last year, and the timing suggests it could represent some profit-taking since it came after the stock nearly doubled in only two months’ time.

Insiders have also been selling Robinhood shares, with the large and growing number of Auto Sell transactions over the last two months also pointing to possible profit-taking among them. However, due to its high valuation and steep share-price increase in such a short period, the stock would have to fall significantly from current levels for me to consider a more constructive view.

Additionally, Robinhood’s direct exposure to cryptocurrency could become a problem if or when volatility returns to the crypto market. A key question is whether it can continue on its path toward profitability if the bottom falls out of the cryptocurrency-trading market.

What Is the Price Target for HOOD Stock? 

Robinhood Markets has a Hold consensus rating based on four Buys, six Holds, and three Sell ratings assigned over the last three months. At $16.73, the average Robinhood Markets stock price target implies downside potential of 9.3%.

Charles Schwab (NYSE:SCHW)

At a P/E of around 27.5x and a P/S of about 7x, Charles Schwab is trading at a sizable premium to its industry’s current valuation but a bit lower than its industry’s three-year average P/E. Schwab is not as overbought as Robinhood, but it’s teetering on the edge of overbought territory and starting to reverse course. Still, I’d like to see the price fall a bit further before becoming more constructive on the shares. Thus, a neutral view seems appropriate.

Currently, Schwab’s RSI stands at around 65, both on the daily and weekly time frame. Earlier this week, it was above 70 on the daily time frame. This shift suggests that the correction I’ve been waiting for may have just begun.

Schwab shares have been rising at a much more reasonable pace than Robinhood stock, although Schwab insiders have also been selling their shares lately. In fact, a notable shift from Auto Buy transactions about a month ago to mostly Auto Sell transactions a little less than a month ago coincided with a meaningful rise in Schwab shares from about $68 to $72.

However, there have been a couple of Informative Buy transactions from insiders within the last two weeks, as they fully exercised their options and kept their shares. This suggests that insiders like where the company is right now, which is a bullish sign for Charles Schwab in the long term. In fact, the company recently guided for a 5% to 6% sequential increase in revenue growth for the first quarter, which is an excellent sign.

Additionally, Schwab’s long-term gains of 72% over the last five years and 213% over the last 10 provide further evidence that this stock would be an excellent buy-and-hold candidate. However, given that we’re just seeing the beginning of the expected correction after the stock reached overbought territory, I’d probably wait and monitor Schwab stock as it falls to a more attractive price.

What Is the Price Target for SCHW Stock? 

Charles Schwab has a Moderate Buy consensus rating based on nine Buys, five Holds, and one Sell rating assigned over the last three months. At $74.07, the average Charles Schwab stock price target implies upside potential of 3.8%.

Conclusion: Bearish on HOOD, Neutral on SCHW

As both Robinhood and Charles Schwab start to tumble back out of overbought territory on the heels of significant profit-taking in their shares, it’s beginning to look like the corrections normally expected after stocks become overbought have begun. However, Schwab is the winner of this pairing based on insider activity, long- and short-term share-price trends, and the potential for steady share-price appreciation with less volatility compared to Robinhood.

On the other hand, Robinhood could see some positive catalysts as it gradually becomes profitable in 2024. Regardless, at current levels, the stock is essentially priced for perfection, so any temporary wobble on the path to this year’s promised profitability could trigger a nasty sell-off.

In fact, Robinhood’s direct exposure to cryptocurrency trading could become an issue in the event of another major crypto sell-off. Thus, it’s good news for Schwab shareholders that the company doesn’t allow cryptocurrency trading.

Disclosure