Shares of investing platform Robinhood Markets (HOOD +2.66%) dropped 13% in November, according to data provided by S&P Global Market Intelligence. The company reported excellent third-quarter results, but it's been highly reliant on cryptocurrency trading, and many high-profile cryptocurrencies have been falling recently.
More than meme stocks?
Robinhood has evolved from a marketplace for speculative stock investing to a platform for...other types of speculative investing, while also expanding into more traditional financial services, which provides it with greater stability. Today, it has a growing list of products, including cryptocurrency trading, credit cards, and a membership club. It has also become highly profitable.
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The third quarter results, at first glance, were outstanding. Revenue doubled year over year, and net income was up 271%. However, it added only 2.5 million new funded customers, a 10% year-over-year increase, to reach 26.8 million. That's not a huge increase, by number or percent, for a high-growth company. It did add 1.7 million new Gold members, a 77% increase, and this is a group with strong engagement. They also pay $50 annually to be in the club, which is a revenue booster.
Another notable aspect is the significant contribution of cryptocurrency trading to the company's growth. Sales from cryptocurrency trading increased 300% year over year in the quarter to $268 million. Options trading revenue was up 50% and accounted for nearly half of total transaction revenue of $730 million, and equities trading increased 132%, but was only $86 million.
Robinhood has been launching new products in new regions at a rapid pace, like shorting and Robinhood Social, a platform for investing discussions. One of its major goals is to add more cryptocurrencies.
NASDAQ: HOOD
Key Data Points
Bull markets and speculative investments
Robinhood stock has crushed the market over the past few years as its business has exploded. It's up more than 1,000% over the past three years, while the S&P 500 is up only 75%. Investors have been excited about its performance and opportunities.
However, Robinhood stock has become quite expensive, trading at a P/E ratio of 52. That means there's little room for error. What happened in November is that many large cryptocurrencies dropped, and since cryptocurrency makes up a significant part of the company's business model right now, that's concerning. More practically, lower trading could mean lower revenue.
Robinhood is doing a good job of diversifying its business and leveraging its platform to perform well in a bull market. However, there's risk, as it currently relies on strong trading activity and riskier asset classes.
