Robinhood stock has fallen 40% from its all-time high, and its third-quarter revenue leans on options trading, which carries risk for retail clients. The stock still trades at a premium to its average price-to-sales ratio, according to the Motley Fool.
Robinhood Markets hit an all-time high of $152.46 last year and has since fallen 40%, as investors worry about the sustainability of its growth. The Motley Fool's Anthony Di Pizio argues that the behavior of the platform's clients is a key reason for concern.
Options drive third-quarter revenue
Robinhood generated $1.4 billion in revenue during the third quarter, a 12% increase from the year-ago period. Transaction-based revenue made up $867 million of that total, and net interest income contributed $415 million.
Options were the single largest contributor to transaction revenue, at $399 million, up 31% from a year earlier. Cryptocurrency trading revenue, however, fell 55% to $120 million as steep corrections in most major coins and tokens kept investors sidelined.
The 2021 to 2022 precedent
The source says several studies have found that most retail investors lose money over time when they trade options. Robinhood has seen a similar setup before: in Q2 2021, most of its transaction revenue came from options and crypto. By Q2 2022, options revenue was down 31% and crypto revenue had dropped 75%, which led to a 90% decline in the stock.
The author sees a high chance history repeats. Elevated inflation, rising interest rates and turbulence in the artificial intelligence industry could trigger the next bear market and take Robinhood's options commissions down with it. Prediction markets, which Robinhood has entered, add a new source of revenue.
Valuation stays above the long-term average
Even after the drop, Robinhood trades at a price-to-sales ratio of 16.7, against an average of 12.3 since it went public in 2021. The stock would have to decline a further 26% to match that average.
Rising rates could offer some offset. If interest rates continue to rise, net interest income could get a bump that offsets at least some of a decline in options commissions, according to the article.
Source: Motley Fool
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