Robinhood Markets (HOOD -1.88%) recently became a hot topic again after a series of negative developments caused the online brokerage's stock to tumble below its IPO price of $38. Let's review those headlines, if investors overreacted, and if its stock is still worth buying.

An ugly earnings miss

Robinhood's latest decline started after it released its disappointing third-quarter earnings report on Oct. 26. Its revenue grew 35% year over year to $365 million, but missed analysts' estimates by nearly $73 million. Its guidance for "less than $1.8 billion" in revenue for the full year, which implies a maximum of 85% growth, also broadly missed expectations for 111% growth.

A child holds a declining stock chart.

Image source: Getty Images.

To make matters worse, Robinhood's monthly active users (MAUs), funded accounts, assets under custody (AUC), and average revenue per user (ARPU) all declined on a sequential basis. It blamed that slowdown on the market's waning interest in more speculative cryptocurrencies like Dogecoin (DOGE -2.42%).

On the bottom line, Robinhood's net loss widened from $11 million to $1.32 billion as it paid out a whopping $1.24 billion in stock-based compensation expenses. Those bonuses were pegged to the stock's post-IPO performance, and its initial rally -- which boosted its shares to an all-time high of $85 a share on Aug. 4 -- triggered the massive payouts to the company's founders.

A massive data breach

On Nov. 8, Robinhood disclosed that it had suffered a data breach five days earlier. It said the threat had been "contained," but admitted that the hackers had obtained the email addresses for approximately 5 million users and the full names of a different group of about 2 million users. In other words, the attack potentially affected nearly 40% of Robinhood's MAUs.

Robinhood also said the additional personal information of 310 other users -- including their names, dates of birth, and zip codes -- were exposed. Within that group, 10 users suffered even "more extensive" breaches.

Robinhood said that no Social Security numbers, bank account numbers, or debit card numbers were exposed in the breach and that the breach didn't cause any financial losses for its customers. Nonetheless, the incident could tarnish its brand and cause its potential customers to pivot toward other free trading platforms like Square's (SQ -0.01%) Cash App.

The escalating war on PFOF trading

Robinhood provides "free" stock trades by selling its customers' orders to market makers like high-frequency trading firms (HFTs). HFTs then book a tiny profit from the bid-ask spread of each order.

This payment for order flow (PFOF) model might seem like a "win-win-win" deal for the investor, the brokerage, and the HFT, which usually offer stocks at more favorable prices than public exchanges. However, the critics claim the PFOF model prevents retail investors from ever getting the best prices.

Robinhood relies heavily on PFOF revenue to provide commission-free trades, but the U.S. Securities and Exchange Commission (SEC) has been mulling an outright ban on PFOF trades over the past year. That unresolved threat has cast a cloud over Robinhood's stock ever since its IPO.

PFOF trades have already been banned in Canada, the U.K., and Australia. That's why Robinhood's stock sank again on Nov. 9 after a Bloomberg report claimed the European Commission was also mulling a ban on PFOF trades. If the U.S. and Europe both ban PFOF trades, Robinhood would likely need to start charging commissions for its stock trades.

Did investors overreact to the bad news?

Robinhood is still growing, but analysts expect its revenue to grow just 23% next year as retail investors trade fewer meme stocks and avoid more speculative cryptocurrencies. But based on those expectations, its stock actually looks cheap at less than 13 times next year's sales.

However, Robinhood's valuations will likely remain depressed until it stabilizes its sequential growth, narrows its losses, and overcomes the regulatory headwinds for PFOF trades. Unless it overcomes all those challenges, Robinhood could continue to make the headlines for all the wrong reasons.