In the last 18 months, the number of retail traders investing in the equity markets has increased at a rapid pace. This trend can be attributed to the rise in the number of discount brokers as well as access to multiple valuation and investing tools provided by various platforms.

Another factor that is driving the increase in the number of active investors is the underlying volatility in the stock markets all over the world due to the ongoing pandemic and the spectacular snapback rally witnessed in the aftermath of the bear market of early 2020.

This makes publicly-listed brokers an attractive option for investors.  Today I’ll analyze 2 such brokers, Robinhood (HOOD) with an established player like Fidelity (FIS), to see which stock is a better buy.

Robinhood (HOOD)

Discount broker Robinhood went public last month after it raised $2.1 billion via an initial public offering that valued the company at a market cap of $32 billion. Robinhood’s IPO was priced at $38 per share and since then the stock has surged to $60.

It gained over 50% on Wednesday of this week after noted Wall Street investor Cathie Wood disclosed that Ark Innovation ETF (ARKK) increased its position in the stock.

Robinhood on the other hand has attracted investors looking to invest in growth stocks. In the first quarter of 2021, the number of active accounts touched 18 million, up from 12.5 million at the end of Q4 of 2020 and 5.1 million at the end of Q4 of 2019.

The broker has successfully monetized its vast base of retail traders as it generates around 38% of revenue from options trades, 26% from its equities vertical, and 17% from cryptocurrency traders.

Robinhood is also expanding its product portfolio and provides a subscription offering that includes research reports and other features for $5/month. Its average revenue per user now stands at $137 which is significantly higher than $37 in 2017. In case Robinhood manages to increase its active accounts to 25 million and its ARPU to $150 by the end of 2021, it will generate $3.75 billion in annualized revenue.

Fidelity National Information Services (FIS)

Fidelity National Information Services is a well-known financial company valued at a market cap of $79.6 billion. The financial giant provides technology solutions for merchants, banks, and global capital market players.

FIS has managed to increase its sales from $8.42 billion in 2018 to $12.55 billion in 2020. Wall Street now forecasts sales to grow by 9.5% to $13.74 billion in 2021 and by 8% to $14.85 billion in 2022. Comparatively, its earnings per share are estimated to grow at an annual rate of 17% in the next five years.

FIS is trading at a forward price to 2021 sales multiple of 5.8x and a price to earnings multiple of 19.8x which is reasonable given its growth forecasts. In the last five years, Fidelity has underperformed the broader markets. It has returned 77% in cumulative returns compared to the 124% gains of the S&P 500.

The final takeaway

For investors looking for steady returns, FIS stock seems a solid bet, as it also provides a dividend yield of 1.2%. For growth investors, HOOD might be a better choice as it has surpassed the returns FIS has generated in the last five years.  But investors should note that investing in HOOD carries significant risks due to its high valuation, lack of visibility in terms of earnings and revenue, and extreme volatility. 

HOOD shares were trading at $60.18 per share on Thursday afternoon, down $10.21 (-14.50%). Year-to-date, HOOD has gained 72.83%, versus a 18.70% rise in the benchmark S&P 500 index during the same period.

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.

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