Robinhood Markets (HOOD 3.65%) has burned a lot of investors since its public debut last July. The online brokerage went public at $38 per share and rose to a peak of $85 a month later. But now, it trades at about $10 a share.

Robinhood lost its luster on Wall Street as its growth in monthly active users and revenue stalled out and its margins crumbled. Rising interest rates also drove many investors away from the riskier "meme stocks" and cryptocurrencies that had driven much of its pandemic-era growth, and that shifting sentiment also made unprofitable companies like Robinhood look a lot less attractive.

I covered a lot of Robinhood's problems in an article published in early May, and I concluded that it was still too risky to own in a growling bear market. But this time, I want to dive deeper into its ridiculously high stock-based compensation (SBC) expenses -- and why they'll prevent it from generating any near-term profits.

A person cheers while using a smartphone.

Image source: Getty Images.

How much has Robinhood been spending on SBC?

It's not unusual for an unprofitable company to subsidize the salaries it pays key employees with big stock bonuses. However, those companies often exclude SBC expenses from their operating and net profits on a non-generally accepted accounting principles (non-GAAP) basis by calling them "one-time" costs.

Yet SBC expenses are usually recurring costs, and companies that rely too heavily on them will keep diluting their shareholders. Here's how much Robinhood spent on SBC expenses over the past year:

Metric

FY 2021

Q1 2022

Revenue

$1.82 billion

$299 million

SBC expenses

$1.57 billion

$220 million

SBC as percentage of revenue

86%

74%

Net income

($3.69 billion)

($392 million)

Data source: Robinhood Markets.

Robinhood's SBC expenses were so high because it paid huge stock bonuses to its co-founders and other executives after its IPO. In 2021, CEO and co-founder Vlad Tenev received $794 million of his total compensation via stock awards. Baiju Bhatt, the company's chief creative officer and co-founder, received $593 million in stock awards.

But in May 2021, their board approved a deal that would unlock even bigger stock awards for Tenev and Bhatt if Robinhood's stock price rises into the $120 to $300 range. It seems doubtful that the stock will ever reach those levels, but the decision to allocate a large portion of its IPO shares to its own investors -- in an apparent bid to make itself a "meme stock" -- might have been made with those lofty prices in mind.

Will Robinhood ever reduce its SBC expenses?

To understand how absurd Robinhood's SBC expenses are, consider the comparable expenses at other fintech companies. In their latest fiscal years, Coinbase Global (COIN -2.88%) and Block (SQ 16.13%) spent just 10% and 3% of their revenues, respectively, on SBC expenses.

At the end of 2021, Robinhood predicted that its total stock-based compensation would decline by 35% to 40% in fiscal 2022. But after its dismal first-quarter report, it predicted its stock-based compensation would decline by approximately 42% to 47% for the year as it reduced its headcount.

That might sound like a step in the right direction, but analysts also expect Robinhood's revenue to decline by 16% to $1.52 billion this year as its growth stalls out. Shaving 47% off of its SBC expenses would only bring them down to $830 million -- or 55% of its anticipated revenue.

Another major reason to avoid Robinhood

Robinhood's IPO and subsequent stock bonuses turned its co-founders into billionaires. But that strategy also severely diluted its shareholders: Its total number of weighted-average shares increased 76% sequentially and jumped 276% year over year in the first quarter.

Robinhood's stock now trades more than 70% below its IPO price, and its high SBC expenses make it an even less appealing investment. I personally believe the best outcome for Robinhood right now would be a buyout -- but a takeover would also make its billionaire founders even richer.