Robinhood Markets (HOOD +5.16%) just released its financial results for the third quarter of 2023, and investors immediately sent its stock plunging 15%. It's now trading a whopping 90% below its all-time high from 2021.
So, what went wrong? Robinhood is an investing platform designed for younger generations, and while that cohort was very active in the financial markets at the height of the pandemic, that enthusiasm has steadily evaporated.
Robinhood is experiencing a structural decline in users and transaction revenue, and the one thing saving the company right now -- interest revenue -- won't be a help for much longer. Here's why I would absolutely avoid Robinhood stock, despite its rock-bottom price.
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Robinhood is struggling to keep users engaged
In mid-2021, Robinhood had 21.3 million monthly active users. They were riding high on the meme-stock frenzy, driven by record low interest rates and government stimulus funds from the COVID-19 pandemic. All three of those factors have since disappeared, and younger investors are now less active in the financial markets as a result.
To be fair, Robinhood continues to accumulate new accounts. It had 23.3 million of them at the end of Q3, which was a year-over-year increase of 1.7%. However, in September, the platform had just 10.3 million monthly active users -- a 51% drop from the aforementioned 2021 high point.
Simply put, customers are trading much less. Like most brokerage firms, Robinhood relies on a high volume of investing activity to generate revenue, so this is a huge problem.
In fact, Robinhood's transaction revenue sank 11% in Q3 from a year earlier to $185 million. No major asset class generated growth: options trading revenue was little changed, stock trading revenue fell 13%, and cryptocurrency trading revenue plunged 55%.
Higher interest rates propped up Robinhood's Q3 results
Robinhood's interest revenue was one bright spot for the company. Since inflation hit a 40-year high in June 2022, the U.S. Federal Reserve has embarked on the most aggressive campaign to hike interest rates in its history.
That's a win for Robinhood, because it earns interest on the $4.9 billion in cash on its balance sheet, and the $3.4 billion in cash it's holding on behalf of customers. It also earns interest when clients take out margin loans to purchase stocks and other financial securities.
All told, Robinhood's interest revenue came in at $251 million during Q3, a solid 96% increase from a year ago when interest rates were much lower.
The result was enough to drive the company's total revenue to a 29% increase for the quarter, because it more than offset the decline in transaction revenue.
NASDAQ: HOOD
Key Data Points
I still wouldn't touch Robinhood stock
Here's the problem: Interest rates probably won't remain at the current level for much longer. Experts predict the Fed will cut them three times in 2024, which is going to be a headwind for Robinhood's revenue in the new year. At the very same time, the company is still posting operating losses, which means the cash on its balance sheet is slowly depleting.
That will leave Robinhood reliant upon its transaction revenue to drive the company forward, and with its declining active user base, generating growth in that area is going to be extremely difficult.
Robinhood stock is now trading 90% below its all-time high. Investors value the company at $6.9 billion, but considering it has $4.9 billion in cash on hand, they're really valuing the business itself at just $2 billion. That number could shrink further if the latest decline in its stock price worsens.
Unfortunately, Robinhood's business has trended in this direction for the past two years, and none of the recent initiatives it has launched have been successful in reversing its fortunes -- not even its 24-hour stock trading service, or its retirement segment, which has attracted $1 billion in assets just one year after launch.
As a result, I think it's simply too risky to buy Robinhood stock right now.
