Robinhood Markets (HOOD 1.18%) has been closely associated with the wild, meme-stock frenzy of 2021. The company plugged millions of retail investors into the financial markets for the very first time, giving them a user-friendly experience with zero commissions.
These first-time traders were core to Robinhood's brand -- and its financial performance -- but recent quarterly reports issued by the company suggest they haven't stuck around. As high-growth tech stocks and cryptocurrencies began to deflate in price, Robinhood's business followed.
It's part of why investors in Robinhood stock should be nervous. Let me explain.
Image source: Getty Images.
It was mostly about cryptocurrencies, after all
Whether you believe cryptocurrencies are set to replace the global financial system or that they're merely a vehicle for speculation, there are zero arguments they were not a key driver behind Robinhood's success last year.
Robinhood earns revenue from a practice called payment for order flow. Although Robinhood's users aren't paying a commission on trading transactions, the company earns a fee from market makers that is actually executing the trade in such a way that the market makers benefit from the timing of the order flow. Robinhood logs these fees as transaction-based revenue.
This chart of Robinhood's transaction-based revenue shows it peaked at the very same time its clients' cryptocurrency trading activity peaked. The orange line reveals that cryptocurrencies represented 51.6% of Robinhood's revenue in Q2 2021, crashing to 18.1% since -- and taking revenue down with it.
Why does this matter? The global value of the cryptocurrency market has fallen 25% since hitting its all-time high in November 2021. But the majority of Robinhood's clients were trading meme tokens like Dogecoin, which has crashed 80% over a similar period, so there's a real chance investors have pulled back on their trading activity because they've suffered serious losses. That's not a recipe for repeat business for brokers like Robinhood.
Meanwhile, options trading revenue has remained mostly steady since Q4 2020, showing some marginal growth. On the other hand, quarterly revenue from lower-risk securities like equities fell 35% between Q4 2020 and Q4 2021, highlighting a shift away from longer-term, more rational investing among the Robinhood user base. Again, a customer base making risky, short-term investments isn't one that can be banked on for long-term sustainable growth.
It might get even worse
Governments around the world are racing to place guardrails around investors participating in cryptocurrency markets. The U.S. federal government, for example, has put forward proposals that could force brokers to disclose their clients' crypto transactions to the Internal Revenue Service (IRS). That would make crypto investors liable for taxes on their gains every time they sell, exchange, or spend their tokens.
Plus, the Securities and Exchange Commission (SEC) is reviewing whether cryptocurrencies should be classified as securities, which is more than just a label. It would require crypto brokers to abide by strict audit and compliance standards, a cost that could be passed on to investors through higher fees.
These initiatives would also lift the veil of anonymity and diminish the decentralized features that made the cryptocurrency industry so popular in the first place.
Robinhood's apparent reliance on cryptocurrency trading for growth places it at risk of further financial underperformance, so it's no surprise its stock has collapsed 84% from its high price. But there's every chance it could sink even further.
