Robinhood Faces Challenges Despite Recent Stock Surge

Robinhood Markets(NASDAQ: HOOD) made a splash in the market when it went public in 2021 at $38 per share, reaching an impressive high of $85. This surge was largely fueled by the company’s appeal to young, first-time investors, eager to trade stocks and options on its platform.

Unfortunately, the bear market of 2022 led to a sharp decline, with Robinhood’s stock plummeting over 90% from its peak. However, there seems to be a recovery underway, as shares have jumped 315% from a 52-week low of $7.91.

So, is this a good time for investors to buy in? There’s a major risk that could limit Robinhood’s future potential, and it’s worth discussing.

Transaction Revenue Lags Behind 2021 Levels

In 2021, during an unprecedented trading frenzy, Robinhood boasted 21.3 million monthly active users. Factors like low interest rates, vast pandemic-related financial support, and lockdowns spurred interest among young investors, driving them to venture into meme stocks like GameStop.

The primary way Robinhood makes money is through transaction fees. Whenever users buy or sell stocks, options, or cryptocurrencies, the company earns a fee. In Q2 2021, Robinhood’s transaction revenue hit a record high of $451 million.

Fast forward to Q3 2024, the figure dropped to $319 million, which is not only significantly below the 2021 peak but also less than both the first and second quarters of 2024. This decline was mainly due to lower activity in the stock and cryptocurrency markets.

This stagnation in revenue growth raises concerns about Robinhood’s core business.

During the most recent quarter, Robinhood reported only 11 million monthly active users, down 48% from its 2021 peak. This decline suggests that the platform may be losing its attractive edge, making it hard for the company to boost transaction revenue if user numbers continue to fall.

Interest Income Faces Significant Risks

From March 2022 to August 2023, the U.S. Federal Reserve increased the federal funds rate from a historic low of 0.13% to a two-decade high of 5.33%.

Currently, Robinhood holds $4.8 billion in cash on its balance sheet, plus $4.4 billion in cash for clients. This money earns interest, and Robinhood also benefits from $5.5 billion in margin loans clients use to buy stocks.

High interest rates have greatly benefited Robinhood. In Q2 2024, the company’s net interest revenue reached a record $285 million—surpassing its total interest revenue for 2021. This growth has driven Robinhood’s overall revenue increase over the past three years.

However, net interest revenue fell to $274 million in Q3, hinting at potential continued declines. The Fed’s recent cuts in interest rates could further reduce this income in Q4 and into 2025.

Current Valuation Out of Line with Projections

Following a 315% increase from its 52-week low, Robinhood’s stock now has a price-to-sales (P/S) ratio of 12.1—its highest in two years and 59% above its long-term average of 7.6 since its IPO.

Investors typically see a higher P/S ratio when a company’s revenue is rapidly expanding. But with Robinhood’s revenue declining over the past two quarters, it seems illogical for its valuation to be climbing sharply.

Investors entering the stock now may risk significant losses if the company fails to meet revenue expectations in the coming months.

So, is it too late for investment? The signs suggest it may be.

A Cautionary Note for Potential Investors

Have you ever felt as though you missed your chance to invest in a successful stock? Consider this advice.

Occasionally, our expert analysts identify “Double Down” stock recommendations for companies poised to soar. If you’re concerned that you’ve missed your opportunity, it’s essential to act quickly before it’s too late. The data demonstrates remarkable growth:

• Amazon: If you had invested $1,000 when we doubled down in 2010, you’d now have $22,819!
• Apple: If you had invested $1,000 when we doubled down in 2008, you’d now have $42,611!
• Netflix: If you had invested $1,000 when we doubled down in 2004, you’d now have $444,355!

We currently have “Double Down” alerts for three companies that are worth considering, as the opportunity may not last long.

See 3 “Double Down” stocks »

*Stock Advisor returns as of November 11, 2024

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.