Why Is Robinhood Stock Down 40% From Its Record High?

Robinhood Markets (HOOD -7.21%), an investing platform allowing clients to buy and sell various assets, saw its stock price drop by 40% from last year's record high of $152.46. The company's growth sustainability has become a concern for investors. While a diversified portfolio of at least 50 stocks is recommended for long-term wealth building, many of Robinhood's clients engage in short-term trading, often resulting in significant losses.

Notably, Robinhood's commissions from options trading surged three times higher than those from stock investing in the third quarter (ended Sept. 30), raising potential issues for the business. In the same period, Robinhood generated $1.4 billion in revenue, with $867 million from transaction-based revenue and $415 million from net interest income.

Options trading contributed $399 million, a 31% increase, while cryptocurrency trading revenue fell by 55% to $120 million. Retail traders frequently use options for short-term bets, which can be profitable during bull markets but lead to steep losses when markets correct. History has shown that Robinhood's options and crypto markets have suffered declines before, with options revenue down 31% and crypto revenue collapsing 75% in the second quarter of 2022.

The company has also started generating revenue from prediction markets, but this introduces even riskier, all-or-nothing bets. Despite the 40% decline, Robinhood's stock remains at an elevated price-to-sales (P/S) ratio of 16.7, suggesting a potential further 26% decline to reach its long-term average P/S ratio. However, if interest rates rise, Robinhood's net interest income could increase slightly, partially offsetting the decline in options commissions.

But given the uncertainties and the company's valuation, I would not recommend buying Robinhood stock at the moment due to the high risk of further downside.