Robinhood Markets (NASDAQ: HOOD) went public in 2021 at $38 per share and quickly rocketed to an all-time high of $85. Investors rewarded the company's ability to attract young, first-time investors who wanted to trade financial assets like stocks and options contracts to its platform.
However, the bear market during 2022 spooked many of Robinhood's clients, and its stock subsequently plunged by more than 90% from its record high. A recovery is now underway, and Robinhood stock has soared 315% from its 52-week low of $7.91.
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But is it too late for investors to buy? There is a key risk that might cap Robinhood's upside potential from here, and I'll tell you what it is.
During the peak of the stock market frenzy in 2021, Robinhood had 21.3 million monthly active users on its platform. Historically low interest rates, trillions of dollars in pandemic-related stimulus payments, and lockdown restrictions were a winning combination for Robinhood's young investor base, who threw caution to the wind in meme stocks like GameStop.
Robinhood's primary revenue source is processing transactions on behalf of its clients. The company earns a fee every time an investor buys or sells a stock, futures contract, options contract, or cryptocurrency. In the second quarter of 2021, Robinhood's transaction revenue was $451 million, a record high that still stands today.
During the recent third quarter of 2024 (ended Sept. 30), Robinhood's transaction revenue came in at $319 million. Not only is that way below its Q2 2021 peak, but it was actually down from both the first and second quarters of 2024, led by declines in the stock and cryptocurrency segments.
Robinhood's core business hasn't really grown in the last three years, at least when measured by its quarterly revenue. So, what's the issue?
During Q3, Robinhood had just 11 million monthly active users. That's down 48% from the 2021 peak and marks the low point for 2024 so far, which suggests the platform might have lost some of its appeal. It will be very difficult for Robinhood to grow its transaction revenue from here if active users continue to drop off.
But that might not be the biggest risk facing the company right now.
Between March 2022 and August 2023, the U.S. Federal Reserve raised the federal funds rate (overnight interest rates) from a historic low of 0.13% all the way to a two-decade high of 5.33%.