Shares of Robinhood Markets (NASDAQ: HOOD) advanced by 9.6% in the after-market hours on Wednesday evening; this spark in seemingly bullish sentiment comes amid the company reporting its first quarter 2023 earnings results. As key performance indicators (KPIs) within the retail brokerage grew significantly over the recorded period, some investors - and bulls at that - hope these developments will be enough to kickstart a new rally out of the near all-time low valuations in the stock.

Management is focusing on a diversified arsenal of new products to keep growing its user base and subsequent monetization opportunities for the underlying. However practical these efforts may be, current market conditions indicate investor preference shifting toward established and predictable cash flows rather than the potential of double or even triple-digit compounded average growth rates (CAGRs). 

Tailwinds in Democratization 

Robinhood's mission since its inception has been to democratize financial markets; having achieved a total of 11.8 million monthly active users speaks to the effectiveness of this campaign. However, despite increasing the user base, a brokerage business model can only work if the underlying user population is monetized through traditional - and sometimes innovative - methods.

As a result, Robinhood management has been on a constant quest to launch educational and financial services programs inside the platform, which has accrued some monetization and growth. From the Robinhood cash card service in 2022 to securities lending and retirement services, Robinhood is beginning to transform itself into a recognizable all-in-one shop.

Robinhood financials will show, alongside management's presentation breakdown, that total revenues grew to a whopping $441 million to post a 16% growth quarterly. Realizing the importance of proper and ample liquidity within balance sheets, Robinhood has rolled out a competitive yield on its cash accounts. While companies like Apple (NASDAQ: AAPL) rolled out their financial incentive products to draw in depositors via its Goldman Sachs Group (NYSE: GS) 

Apple card yielding upwards of 4.15% APY, Robinhood just released its latest ace. The newest update to Robinhood users will reflect a current 4.4% APY for its user's available cash balance. As a result of this strategy, net deposits at the retail brokerage experienced an annualized 29% growth rate. Currently, Robinhood handles $78 billion in total assets under custody (AUC). 

While higher valuations pushed Assets under custody on growth stocks, the inflow of deposits significantly increased the firm's size. Assets under control, however, are 23.5% lower than their high of $102 billion in the second quarter of 2021. Now that the company is successfully drawing in more users and depositors with such strategies and product rollouts, only monetizing such could help boost investor sentiment.

Where Faith Fades

As the company remains in its 'growth stage,' meaning there are no profitability expectations for the near future, net losses and negative operating margins leave management with some tough choices. Diluted share counts grew by 1.3% year-over-year, ending the quarter at 975 million.

Management expressed in its presentation that investors could be in for a further 4% dilution in 2023, enough of a pressure point to cancel nearly all share-based compensation for the year. Where key executives and employees expected total share-based compensation of $925 million to $1 billion, management has canceled these payouts to be reduced by as much as $485 million. 

While this may seem favorable for the company and its shareholders, it is a short-term fix to a more significant long-term issue. As long as the company remains in net loss territory, it will eventually need to continue diluting shareholders to fund further operations. The alternative of raising debt capital seems out of reach for now.

The fourth quarter of 2022 saw a net loss of $166 million, or negative earnings per share of $0.19. In the first quarter of 2023, the company reported a deepening net loss of $511 million to post a total $0.57 loss per share. Despite aggressive product rollouts and double-digit growth across the company's KPIs, the stock risks remain at compressed valuations. At the same time, the business matures past this growth stage.

One concerning trend for investors comes in the monetization itself, despite a growing active monthly user base. Management will show that the first quarter of 2021 produced average revenue per user (ARPU) of $137, a 78% higher rate than today's $77. The company is burning through cash, taking on added product development and marketing expenses to attempt exponential growth of its user base.

However, the monetization rate cannot seem to get off the ground; and while this is the case, the stock may have no reason to rally yet.