Robinhood Markets (HOOD -1.76%) was once the envy of the stockbroking industry. It achieved something most brokers have struggled with: It successfully attracted young, first-time investors and got them excited about participating in the financial markets. 

During the pandemic, a mixture of lockdowns and stimulus checks gave these investors more time and money to focus on investing, and it drove a boom in Robinhood's business. But now those factors have faded, and the company is experiencing an alarming deterioration.

Robinhood released its financial results for the second quarter of 2022 on Aug. 3, and they revealed further losses. Those losses weren't just financial -- the company also continued to lose active users. However, there were a couple of positives, but are they enough to warrant buying Robinhood stock?

Robinhood's assets under custody collapsed in Q2

Robinhood earns the majority of its revenue based on transaction volume through its controversial payment for order flow (PFOF) model. When customers place a market order to purchase a stock or financial asset, Robinhood sells the order to a third-party market maker who fills it at a slightly worse-than-market price and pockets the difference.

It's how Robinhood facilitates its zero-commission business model, and it has been under fire in the past for telling customers they're paying less in fees, not more, under the PFOF arrangement, which simply isn't true. 

Since Robinhood's revenue is transaction-based, the company wants to see its assets under custody (AUC) consistently rise. That equation is simple: The more assets clients hold in their Robinhood accounts, the greater the potential transaction volume, and therefore, the more fees the company could earn. 

But in the second quarter of 2022, Robinhood's AUC collapsed by 31% to $64 billion -- the lowest level since late 2020. 

A chart of Robinhood's assets under custody.

The company said this drop was mainly due to the broader markets falling, which devalued its customers' stock holdings. This is true, and on a positive note, Robinhood customers deposited a net $5.2 billion in new money into their accounts during the quarter. However, it doesn't change the fact that this is a substantial decrease in Robinhood's fee-earning assets overall, which could hurt its business going forward. 

Active users fell, but revenue per user slightly rose

The number of users who engage with the Robinhood platform each month fell in the second quarter, the fourth consecutive quarter. There are now 34% fewer clients actively using Robinhood compared to Q2 2021.

However, the average amount of revenue Robinhood earns from each user jumped by $3 from the prior quarter, which arrested a four-quarter decline. But it's worth pointing out that the figure is still down 59% from its all-time high set last year. 

A chart of Robinhood's monthly active users and average revenue per user.

Average revenue per user rises when clients transact more often, which, in a volatile market, is fairly typical. Investors will need to wait a few more quarters to determine whether this is the beginning of an uptick or a one-off blip before the figure continues on its downward trajectory. 

Still, it was enough for Robinhood's total revenue to increase in the second quarter by 6% sequentially to $318 million, but the number was still down a whopping 43% compared to Q2 2021. 

Robinhood faces significant challenges ahead

Thanks to some cost-cutting over the last 12 months, Robinhood was able to shrink its net loss to $295 million in the second quarter, which was the lowest level since the beginning of 2021. The company also has over $6.2 billion in cash and equivalents on its balance sheet, so it has a long runway to turn its fortunes around. 

However, the company's PFOF revenue model remains under fire from regulators, as does its smartphone app, which some critics contend gamifies the investing experience and could potentially encourage its young, inexperienced users to take risks. PFOF is banned in just about every developed economy except the U.S., and so Robinhood's potential for growth and expansion is incredibly narrow.

To make matters worse, the New York State Department of Financial Services has accused Robinhood of violating anti-money-laundering rules and subsequently fined the company $30 million earlier this week. 

While Robinhood stock is down 88% from its all-time high and trades only slightly above cash value, that doesn't mean it's worth buying. It's never a good idea to invest in a shrinking business, and it seems unlikely another pandemic-esque environment is around the corner to rescue this one. 

Combined with the regulatory challenges, investors might be better off simply avoiding Robinhood stock entirely.