Robinhood’s new earnings report raises concerns about the company’s reliance on crypto trading

October 28, 2021, 2:45 PM UTC

Morning, folks. This is Fortune reporter Rey Mashayekhi filling in for Lucinda today.

Well, Robinhood investors can’t say they weren’t warned.

After the stock-trading app announced its intention to go public earlier this year, one of the most notable revelations from its S-1 prospectus filing with the Securities and Exchange Commission was the extent to which its business relied on cryptocurrency trading. Crypto accounted for 17% of Robinhood’s revenues in the first quarter of this year; what’s more, those crypto revenues were themselves heavily dependent on low-value meme-coins like Dogecoin, which alone represented 34% of the company’s crypto turnover.

The extent to which Robinhood was relying on crypto to drive its business reportedly raised enough eyebrows at the SEC to slow its march to the public markets. But neither that, nor the company’s reliance on payment for order flow to prop up its no-free trading model, nor its dependency on the millennial-fueled meme-stock craze to grow its business, ended up derailing its IPO. Robinhood debuted at $38 a share in late July—and after some early hiccups, it’s been a mostly steady, if somewhat underwhelming ride for the stock. Still, the company has had no shortage of doubters on Wall Street—with various traders foretelling of “a lot of uncertainty about the future” for Robinhood and “a rollercoaster ride to come” on the public markets.

That rollercoaster dipped into a freefall in the wake of Robinhood’s third-quarter earnings report after Tuesday’s close. Robinhood shares fell more than 10% Wednesday and dipped below their IPO price, with the main culprit being (surprise!) a sharp decline in crypto-related revenues that dragged down the company’s results. Third-quarter turnover stood at only $365 million—down $200 million from the second quarter, and missing analyst estimates by a longshot. Crypto revenues came in at just $51 million, which were less than a quarter of the $233 million that Robinhood generated from digital assets in the previous period. As far as its bottom line, Robinhood posted a net loss of $1.32 billion in the third quarter, which also missed analyst expectations for the worse.

Those underwhelming results coincided with an 11% drop in monthly active users compared to the second quarter, or 2.4 million fewer active users. Meanwhile, it doesn’t appear that investors can bet on sunnier earnings on the near-horizon, with Robinhood warning that the retail-trading slowdown that hindered its third-quarter results will likely persist through the end of this year.

Despite being anchored down by poor crypto-trading numbers, it seems unlikely Robinhood either can or will look to distance itself from the crypto revolution. CEO Vlad Tenev talked up its development of a crypto wallet product that he said now has a waitlist exceeding one million users, while people are clamoring for Robinhood to add the red-hot Shiba Inu token to its platform. But even Shiba Inu’s success sheds light on the extent to which the company is swimming in volatile, regulatorily murky waters. On Robinhood’s earnings call Tuesday, Tenev cited an “uncertain and evolving” regulatory environment around new coins and crypto products, and said the company would have to “carefully evaluate” whether it could expand its crypto offerings beyond the seven tokens it currently allows customers to trade.

Of course, shaky quarterly results are a risk that all investment brokerages have to reckon with; revenues and profits usually ebb and flow with the overall state of the equities markets, and boom periods will always be followed by a slowdown at some point. But Robinhood’s latest results depict just how shaky things are liable to get for the company—and just how much its business continues to depend on a fledgling sector that remains highly unpredictable.

RUNNING AWAY WITH IT: In other public market news this week, Wednesday brought the stock market debut of e-commerce startup Rent the Runway. The company raised $357 million on the Nasdaq after IPO’ing at $21 a share—the top-end of its expected range—in a listing that initially valued it at north of $1.3 billion.

Despite having a rough go of things during the pandemic, Rent the Runway has seen its user base rebound prolifically this year on the back of an increasingly popular, rent-what-you-wear business model that caters in high-end, designer clothes. In an interview with Fortune, co-founder and CEO Jennifer Hyman talked up the IPO as “a step forward for all women-led companies,” and added that it would give Rent the Runway the liquidity needed to grow its “capital-intensive business.”

Unfortunately, Wednesday’s trading didn’t go particularly well for the company. After surging to north of $24 a pop at one point, shares eventually dipped below their IPO price and closed the day’s trading down 8%, at $19.29. Early days.

Rey Mashayekhi
Twitter: @reym12

Anne Sraders curated today’s Term Sheet.


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