Robinhood faces unavoidable risks.
robinhood market (hood 0.31%) went public in 2021 at $38 per share and quickly soared to an all-time high of $85. Investors praised the company's ability to attract young, first-time investors looking to trade financial assets such as stocks and option contracts on its platform.
But the 2022 bear market caught many of Robinhood's customers by surprise, and the company's stock has since fallen more than 90% from its all-time high. Now that the recovery is underway, Robinhood stock has soared 315% from its 52-week low of $7.91.
But is it too late for investors to buy? There are key risks that could limit Robinhood's upside potential from here on out, and we'll explain what they are.
Robinhood trading revenue still down from 2021 levels
At the peak of the stock market frenzy in 2021, Robinhood's platform had 21.3 million monthly active users. Historically low interest rates, trillions of dollars in pandemic-related stimulus, and lockdown restrictions are a win-win combination for Robinhood's younger investor base, and Robinhood is wary of meme stocks like: Ta. game stop.
robinhood primary Their revenue source comes from processing transactions on behalf of their customers. The company receives a commission each time an investor buys or sells stocks, futures contracts, options contracts, or cryptocurrencies. Robinhood's trading revenue for the second quarter of 2021 was $451 million. It is still at a record high.
In the recent third quarter of 2024 (ending September 30), Robinhood had trading revenue of $319 million. This is not only significantly below the peak in Q2 2021, but was actually down from both Q1 and Q2 2024 due to declines in the equities and crypto sectors.
Robinhood's core business hasn't grown much over the past three years, at least when measured by quarterly revenue. So what's the problem?
During the third quarter, Robinhood had just 11 million monthly active users. This is down 48% from its peak in 2021 and is the lowest point in 2024 so far, suggesting the platform may have lost some of its appeal. If active users continue to decline, it will be very difficult for Robinhood to grow transaction revenue from here.
But that may not be the biggest risk facing the company right now.
Image source: Getty Images.
Robinhood's interest income faces unavoidable risks
From March 2022 to August 2023, the US Federal Reserve raised the overnight federal funds rate from a historic low of 0.13% to a 20-year high of 5.33%.
Robinhood currently has $4.8 billion in cash on its balance sheet, on top of the $4.4 billion in cash it holds for customers. That money is kept in a bank account and interest is paid to the company. Additionally, Robinhood earns interest income from $5.5 billion in margin loans currently held by customers, which they use to purchase stocks and other financial assets.
Simply put, high interest rates are a huge tailwind for Robinhood. In fact, the company's quarterly net interest income hit an all-time high of $285 million in the second quarter of 2024 (ending June 30). That's more revenue than the company generated in all of 2021, when interest rates were at historic lows. In other words, this has been the main driver of Robinhood's total revenue growth over the past three years.
Net interest income fell to $274 million in the recent third quarter, and this could be the start of a continued decline. That's because the Fed cut interest rates by 50 basis points at its September meeting and another 25 basis points this month. Therefore, investors should prepare for an even steeper decline in Robinhood's net interest income from next quarter to 2025.
Robinhood stock is currently significantly more expensive than its history.
Robinhood stock is up 315% from its 52-week low, and its price-to-sales (P/S) ratio has soared to 12.1. This is the highest level in two years and represents a 59% premium to the long-term average of 7.6 since listing in 2021.
Food PS ratio Depends on the data Y chart
The P/S ratio is calculated by dividing a company's market capitalization by its earnings, so investors typically pay a premium if earnings are growing rapidly. In Robinhood's case, its trading revenue has declined for two consecutive quarters (on a sequential basis), and net interest income may continue to decline.
Therefore, it doesn't make much sense for Robinhood's valuation to rise so aggressively, and investors who buy the stock now risk being dragged down if the company's earnings disappoint in the next few quarters. may be incurred.
So is it too late to buy stocks? I think the answer is yes. Its biggest advantage may be in the rearview mirror.
