A gold rush is a great time to be in the shovel business, and during 2020 and 2021, the financial markets were as frenzied as they've been at any other time in history. Naturally, then, it was also a boom time for stock trading platform Robinhood Markets (HOOD -6.20%).

The company made a name for itself as the go-to investment platform for Gen Z, particularly for those who were entering the markets for the very first time. They were attracted to Robinhood's zero-commission fee structure and easy-to-use smartphone app, and their participation sent the company's valuation soaring.

But since hitting an all-time high of $85 last year, Robinhood stock has crashed almost 90% to just $10 today. It's because the stock market has faltered this year, which has damped the enthusiasm of young investors, and there isn't much sign of a turnaround. Here's why Robinhood stock doesn't represent a buying opportunity right now, despite its steep decline.

Robinhood's customers have slashed their exposure to risk

Like most brokers, Robinhood's business relies on transaction volume. The more its customers participate in the markets, the more money it makes in fees. But unlike other brokers, Robinhood uses an unconventional revenue model called payment for order flow, which involves selling customer orders to a third party in exchange for fees.

The practice is banned in most developed countries except the U.S., and the Securities and Exchange Commission (SEC) found it actually costs customers more money than traditional commission-based models. Why is that important? Well, if trading activity drops, Robinhood misses out on the lucrative income from its third-party market makers.

In the third quarter of 2022, Robinhood customers were significantly less exposed to the risky assets that are typically traded more actively. Cryptocurrency holdings, for example, fell by a whopping 58% year over year, from $22 billion to just $9 billion. Similarly, options contracts were down 69%, and regular stock holdings declined by 27%.

To be clear, some of those drops were attributable to a simple decline in the value of those assets, but Robinhood customers' cumulative cash balance soared by 58%, so that's a sign they were also liquidating their holdings. 

Overall, the total value of the combined assets Robinhood holds on behalf of its customers sank by 32% in the third quarter, to $65 billion. That puts a real dent in the platform's ability to increase revenue, because its fee-earning potential is much smaller now. 

Robinhood users are significantly less active

In the second quarter of 2021, Robinhood had 22.5 million funded accounts and 21.3 million monthly active users. In other words, almost everyone who had money in their Robinhood account was actively engaged with the platform.

Now, the company has 22.9 million funded accounts yet just 12.2 million monthly active users, and that active user base has declined for five straight quarters. 

A chart of Robinhood's monthly active users.

One positive is that Robinhood's average revenue per user has ticked up slightly this year, but it's still down by more than half from its all-time high of $137 set in early 2021. The company says the third-quarter increase was driven by a 73% jump in net interest revenue, thanks to the U.S. Federal Reserve's aggressive hike interest rates to battle inflation.

Net interest revenue carried Robinhood's total revenue to $361 million, down 1% compared to the third quarter last year, which was a smaller drop than in prior quarters of 2022.

Robinhood earns interest on margin loans, which customers use to increase their buying power in the markets. Additionally, the company earns interest on customers' cash balances. It's likely net interest revenue will be a source of growth in the coming quarters as well, given rates will probably remain elevated for some time. 

Why investors shouldn't buy the dip in Robinhood stock

A steep decline in the value of a company can sometimes be an opportunity to buy in at a discount ahead of longer-term upside, particularly during a bear market (like the current one) where investors tend to get broadly pessimistic. 

But Robinhood is a shrinking business, and its growth in 2020 and 2021 was largely fueled by U.S. government stimulus, ultra-low interest rates, and young people who were under pandemic restrictions with plenty of time on their hands. That mixture of tailwinds is unlikely to come together again, so Robinhood may never see its active user base fully recover. 

Without those users returning, it's difficult to make a case for sustained improvement in Robinhood's financial metrics. For that reason, investors should avoid buying the dip for now.