Robinhood (HOOD) Slides as Crypto Slump Offsets Prediction-Market Boom

Robinhood (HOOD) delivered a record revenue quarter and still got sold. Shares dropped roughly 7% to 8% in pre-market trading Wednesday after third-quarter earnings missed estimates and crypto trading kept sliding.

The numbers, per CNBC's earnings report: earnings per share of 51 cents versus 56 cents expected, and revenue of $1.42 billion, right in line with the Street. Revenue was up 12% from $1.27 billion a year ago.

Net income fell to $468 million from $556 million. On an adjusted basis, StockStory put EPS at $0.60 against a $0.64 consensus, a miss of about 7%.

Transaction revenue is where the story gets interesting. It rose 19% to $867 million but came in under the $879 million StreetAccount forecast. Under the hood, it was a tale of two businesses.

Event contracts, the prediction-market product, grew more than 500% from a year earlier. Options revenue climbed 31% to $399 million and equities revenue rose 41% to $121 million.

Crypto went the other way. Revenue fell 55% to $120 million as spot trading dried up, a steep drop for a product line that used to be a major revenue driver.

Event contracts revenue jumped more than 500% from a year earlier, while crypto revenue fell 55% to $120 million.

Robinhood's CFO, Shiv Verma, told CNBC that event contracts tied to crypto price moves did well in the quarter. In other words, customers still wanted exposure to crypto, just not through spot trading.

Sell-side analysts expect revenue to grow about 30% over the next 12 months, according to S&P figures cited by StockStory, which would be a slowdown from the 42% three-year compound rate but still strong growth for a company with an $83 billion market value.

There was good news in the customer numbers. Net deposits hit $15.7 billion for the quarter, a 17% annualized growth rate, and $71 billion over the past year. Funded customers reached 28.7 million, up 1.9 million from a year ago.

Adjusted EBITDA of $808 million beat the $794 million estimate, and free cash flow margin jumped to 84.6% from 53.2% in the prior quarter, according to StockStory's breakdown on Yahoo Finance. Those are healthy numbers for a company people often treat as a pure trading-volume bet.

The weak spots are real, though. Operating margin slid to 43.9% from 49.8% a year ago, and average revenue per user grew just 4.7% to $200, slower than the user base is growing. More customers aren't yet translating into proportionally more revenue per head.

Analysts mostly stayed constructive. Needham's John Todaro kept a Buy rating but lowered his price target to $116 from $126, which implies about 23% upside from Tuesday's $94.56 close, citing product diversification into retirement accounts, cash sweep and advisory services.

Goldman Sachs' James Yaro also kept a Buy rating while cutting his target to $128 from $145. The FactSet average target sits near $134.83. Both analysts trimmed numbers but kept their ratings, which reads as confidence in the business and less patience for the near-term multiple.

The risk is concentration in volatile activity. Robinhood now leans on options and prediction markets, both of which depend on retail appetite for speculation. And a weak crypto market can persist for a while.

So what's the play? The business is diversifying faster than the headline miss suggests, and the stock's pullback puts it closer to Needham's range. But the next catalyst is whether crypto stabilizes and whether revenue per user starts to catch up with customer growth.

Watch the quarterly pace of event contracts, any change in the crypto trend, and operating margin. If margins keep sliding while revenue per user stays soft, the diversification story gets harder to sell.

Bottom line: Robinhood is building a broader business, but the market wants proof it can grow without leaning on crypto and speculation.