Robinhood’s Risk-to-Reward Ratio Is Improving

Stock Market

Robinhood Markets (NASDAQ:HOOD) stock has played out the full boom and bust pattern inside the space of six months. Like so many other meme stocks, Reddit’s preferred stock trading platform went through its own hype cycle this year.

Robinhood (HOOD) app against white paper background with scattered office supplies.

Source: Sulastri Sulastri /

Robinhood completed its initial public offering (IPO) at the end of July and opened trading around $40 per share. As was fitting for a meme stock trading platform, yet also paradoxical considering the love-hate relationship between the two, HOOD stock became a Reddit darling. Robinhood shares doubled virtually overnight, hitting their all-time high of $85 each.

Within a month, however, Robinhood fell back to $40. And it would get much worse. After a disappointing earnings report, Robinhood’s price tanked. The selling has continued into the winter, with the stock recently slipping below $20. That’s a 75% drop off the highs and a 50% loss for anyone that bought right after the IPO.

With the stock price action being this unrelentingly negative, it’s no wonder that folks are giving up on the company entirely. And it’s true that Robinhood has a lot of long-term problems. The business model, while interesting, isn’t proven to be profitable, at least not yet. However, it’s not quite time to write Robinhood’s obituary. Here’s why HOOD stock still has a chance at redemption.

Volatile Dogecoin Sank HOOD Stock Revenue

Robinhood is most commonly associated with retail stock market trading. If you read Reddit, it’s full of people posting crazy gains and losses on meme stocks, or call options on said meme stocks. Under the surface, however, Robinhood has built a sizable cryptocurrency business.

The company was just gearing it up in 2020 and thus had only modest revenues from crypto. In 2021, however, the combination of broader access to crypto on the trading platform and a massive surge in crypto prices led to a revenue explosion.

In the second quarter of this year, Robinhood’s crypto trading revenues hit $233 million, which was up over 4000% versus last year. Unfortunately for Robinhood, the majority of its entire crypto trading revenue came from just one product, Dogecoin (CCC:DOGE-USD). As you probably know, since this spring and summer, Dogecoin has plummeted. The meme token peaked at 70 cents but has now fallen by about 75%.

Not surprisingly, since Robinhood was relying on Dogecoin for a huge chunk of revenues, it got put in the doghouse when Dogecoin mania stopped. Robinhood’s total crypto revenues (which counts all crypto assets, not just Dogecoin) plummeted to $51 million in the third quarter. That was a more than 75% sequential decline from Q2.

Live by the meme, die by the meme.

Crypto Could Come Back

Right now, crypto is in a bit of a dry spell. The leading assets such as Bitcoin (CCC:BTC-USD) and Cardano (CCC:ADA-USD) have suffered large losses in recent weeks. Meanwhile, we see total carnage in many of the smaller tokens. Right now, things look bleak for Robinhood’s crypto trading revenues.

But we’ve seen massive busts in the crypto space before. Just because everything is sour now doesn’t mean the game is over permanently. And, as far as Robinhood goes, it can always add new tokens to stir up interest once again. Some traders are asking for Robinhood to support trading of Shiba Inu (CCC:SHIB-USD), for example.

User Base Remains Valuable

Robinhood’s core stock trading business doesn’t generate large profits despite its massive user base. That’s understandable, since the company doesn’t charge commissions on trades. Instead, it has to make money from things such as payment for order flow that have come under serious scrutiny this year. The whole controversy around Robinhood freezing trading of GameStop (NYSE:GME) stock in January also put the company in a harsh light.

So yes, there’s no clear solution on how to get better monetization in the short-term. Bulls should be well aware of that risk. However, the flip side is that most financial technology (FinTech) firms are still unprofitable at the moment. The goal seems to be to attract large groups of monthly active users now and figure out the monetization angle later.

Robinhood, despite its controversies, has a huge group of engaged users. At some point, Robinhood may be able to figure out other ancillary products or services that help the company reach profitability. So far, Robinhood’s business execution has been lackluster. However, as long as it has tons of people on the app, there’s a chance of management figuring something out.

HOOD Stock Verdict

It’s easy for critics to come in and slam Robinhood now that shares have collapsed. Yes, there are problems with the business model. Its reliance on cryptocurrency trading and in particular meme projects such as Dogecoin is a particular vulnerability. The company’s gamification of risky investments such as options could also draw regulatory concerns. Many people are frustrated with the payment for order flow mechanism as well.

So yes, if you want to criticize Robinhood, there’s plenty to go after. But is the company an entirely lost cause?

No, no it’s not.

Simply put, any firm that has this large and engaged of a user base has a chance at redemption. Even after the customer exodus following the GameStop drama, Robinhood retains a loyal group of active traders. It’s risky to bet against the company at this point since the valuation has already dropped so dramatically. It’s far from assured that Robinhood will be able to reach a sustainable and profitable business model.

However, HOOD stock still has a shot, and in the meantime, short sellers appear to be overstaying their welcome.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a sizable New York City-based hedge fund. You can reach him on Twitter at @irbezek.

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