Deteriorating unit economics and regulatory risks weigh on growth outlook

Robinhood released its earnings report last night, and its stock price dropped 7% in after-hours trading. The company's third-quarter revenue hit an all-time high, with trading volumes for stocks, options, and prediction markets also setting new records. On the surface, these results look quite impressive. However, after reviewing the earnings report, it turns out things aren't entirely as rosy. The biggest problem Robinhood is facing now is that while more people are coming to the platform to trade and trading is becoming more frequent, the profit per transaction is actually decreasing. Let me share some numbers to give you a sense of this. In the third quarter, Robinhood's stock trading volume increased by 53% year-over-year, but stock trading revenue only grew by 41%. Options trading volume grew by 48%, yet revenue only increased by 31%. The most striking example is the prediction market. In the third quarter, a total of 16.4 billion event contracts were traded, representing a quarter-over-quarter volume increase of over 20%, but revenue only grew by about 11%. Specifically in the prediction market, the average revenue per contract was approximately 1.15 cents in the second quarter, dropping to around 1.05 cents in the third quarter. Don't underestimate this change of one-tenth of a cent; it represents a 10% decline in revenue. For a trading platform processing tens of billions of contracts per quarter, even a slight decrease in unit revenue can translate into a significant gap in profits. Moreover, this trading spread continues to narrow. Previously, people used Robinhood because it could attract more retail investors and keep them trading continuously on the platform. But now, it has become evident that trading volume growth and revenue growth are gradually decoupling. This means that for Robinhood to maintain its past explosive growth, it must constantly seek new sources of revenue. In fact, it is already doing so. Many may not realize that Robinhood now earns more money from prediction markets than from cryptocurrency trading. In the third quarter of last year, Robinhood's cryptocurrency revenue was $268 million. What about this year? It has dropped to $120 million, a direct cut of 55%. On the other hand, prediction market revenue surged more than sixfold, reaching $173 million. Previously, Robinhood made money from retail investors trading Bitcoin, but as Bitcoin trading cooled down, it has started making money from users trading sports events, economic data, and various event contracts. In fact, looking at revenue increments, the money added by prediction markets over the past year almost exactly filled the hole left by cryptocurrency. It must be said that Robinhood's ability to mine new business opportunities is indeed strong. But problems arise with this shift. If a financial platform must constantly find the next hot trading product to maintain growth, is it truly a long-term growing fintech company, or merely a trading platform highly dependent on market sentiment? Furthermore, prediction markets themselves are not as reliable as they appear. Currently, sports-related activities account for about 70% of Robinhood's event contract trading volume. Gambling regulators in some U.S. states have begun scrutinizing the legality of such sports event contracts. This means that one of Robinhood's fastest-growing businesses is also one with significant regulatory uncertainty. There is another, less commonly discussed data point. Robinhood has a business called securities lending. Simply put, customers lend out their held stocks, and the platform earns revenue through securities lending. In the third quarter of last year, the net income from this business was $87 million. In the third quarter of this year, it turned negative, at -$19 million. That is a deterioration of $106 million over one year. The strange part is that during the same period, the number of clients participating in the securities lending program increased by 30%, and the scale of related stock assets grew by 62%. This is equivalent to running a car rental company where more and more owners are willing to rent their cars to you, and your fleet size is growing larger. Yet, fewer people are willing to pay high prices to rent cars, resulting in not just no extra profit, but actual losses. There is also one interesting minor detail. Management specifically emphasized during the earnings call that customer net deposits exceeded $13 billion in October. Doesn't that sound impressive? However, upon closer inspection, $6 billion of that came from funding provided by the Dell family to the Trump Accounts children's account program. Robinhood's profitability remains strong, and it is indeed expanding into new businesses. But the issue lies precisely in the fact that the market has valued Robinhood as a high-growth fintech company, not as a standard brokerage firm. When the market holds you to such high standards, record revenue alone is clearly not enough. Investors also expect to see increasing user bases, more active trading, and higher profits generated per user. The performance Robinhood has delivered tells a different story. Stock trading volume surged significantly, but unit monetization capability declined. Options trading volume surged significantly, but unit monetization capability declined. Prediction markets exploded, yet unit monetization capability also declined. Cryptocurrency business shrank, securities lending net income turned negative, and risk provisions for credit business continue to rise. Robinhood increasingly resembles a financial super-platform, but it is becoming harder to rely on any single business to maintain the stunning growth speed of the past. After all, making money from market hype is a good business, but being able to make money regardless of market ups and downs is the true moat of a financial giant. $HOOD