Robinhood Markets (HOOD 0.27%) experienced explosive growth at the height of the pandemic as its intuitive, gamified trading platform attracted hordes of young, first-time investors. But when the stock and cryptocurrency markets crashed in 2022, Robinhood saw a sharp decline in active users and revenue.
Robinhood has since rebounded from that challenging period, and its stock is up by almost 500% during the past year alone. However, I have serious concerns about the sustainability of the company's comeback, which leads me to think its stock could plunge by 50% (or more) during the next 12 months.
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A repeat of 2022 might be unfolding
There are two parts to Robinhood's revenue: transaction revenue, which comes from processing stock, option, and cryptocurrency trades on behalf of its clients; and net interest revenue, which is the interest income the company earns on its own cash, the cash it's holding on behalf of clients, and on margin loans.
Transaction revenue reflects the performance of Robinhood's core transactions operations, so it's the most important component. It came in at $539 million during the second quarter of 2025 (ended June 30), which was a 65% increase from the year-ago period, but an 8% decline sequentially (compared to the first quarter of 2025).
Revenue from processing cryptocurrency trades accounted for $160 million of Robinhood's total transaction revenue, which was up 98% compared to the year ago, but down 37% sequentially. In fact, it's now down by more than half from its peak of $358 million in the final quarter of 2024, pointing to a severe loss of momentum.
Although Bitcoin continues to set new highs, speculative tokens like Dogecoin and Shiba Inu are down sharply in 2025 because they don't have concrete fundamentals to support their value. As a result, it appears some of Robinhood's clients are moving away from crypto trading entirely.
This isn't the first time Robinhood experienced a bust in this part of its business. Its cryptocurrency revenue soared by 4,560% during the second quarter of 2021 -- and made up half of the company's transaction revenue at the time -- but it had plunged 75% by the second quarter of 2022 just one year later. If the opening two quarters of 2025 are anything to go by, a decline of similar magnitude might be underway.
Falling interest rates might create another headwind for Robinhood
The U.S. Federal Reserve slashed the federal funds rate (overnight interest rate) three times between September and December last year, and three more cuts are expected before the end of 2025. This would normally be a major drag on Robinhood's net interest revenue, but the size of its margin loan book has soared by 72% since the rate cuts started (from $5.5 billion to $9.5 billion). The amount of cash it's holding on behalf of its clients also nearly doubled during the past year, to $8.7 billion.
This has offset the negative effects of declining rates, resulting in a record $357 million in net interest revenue during the second quarter of 2025, which was up 25% from the year-ago period. However, the recent growth in margin loans and cash balances is almost certainly unsustainable, so if interest rates continue to decline further in 2025 and 2026 as expected, Robinhood's net interest revenue probably won't outrun the negative effects for much longer.
As a result, the company's transaction revenue will become increasingly important in the coming quarters, and the recent sequential declines -- led by plunging crypto trading revenue -- don't inspire much confidence.
Robinhood's valuation sets the stage for a sharp correction
Following its huge gain during the past year, Robinhood stock is now trading at an eye-popping price-to-sales (P/S) ratio of almost 29. That's more than triple its long-term average of 9.2, dating back to when the stock went public in 2021.
In my opinion, one of two things will need to happen from here: Robinhood will have to increase its trailing-12-month revenue by 180% very quickly to justify its valuation, or the stock will have to decline by more than half to bring its P/S ratio back in line with its long-run average.
Since we know Robinhood's transaction revenue has declined for two consecutive quarters, and that it's only a matter of time before falling interest rates weigh on its net interest revenue, it seems very unlikely the company will produce the growth required to support its elevated stock price.
To make matters worse, the number of monthly active users on Robinhood just declined for the second-straight quarter to 12.8 million. It will be even harder for the company to increase its revenue with fewer clients actively trading. Therefore, I think a sharp correction in Robinhood stock is the most likely outcome during the next year or so.
