Prediction: 1 Soaring Cryptocurrency Stock Could Plunge by 50% (or More)

Robinhood Markets (NASDAQ: HOOD) stock has been on a tear lately, with a whopping 358% gain over the past 12 months alone. The company has benefited from heightened activity in the financial markets, with everything from stocks to cryptocurrencies reaching record highs over the last few months.

Robinhood is known for its ability to attract young, first-time investors to its brokerage platform, which is something most of its competitors have struggled with. However, its business is facing structural challenges that will be extremely difficult to overcome in the long run, so investors should be very cautious about the recent surge in its stock price.

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In fact, I think Robinhood stock could plunge by at least 50% from its current price around $50 (as of this writing). Here's why.

Robinhood's core business is currently smaller than it was in 2021

Robinhood has two primary sources of revenue. First, there is transaction revenue, which it earns when clients buy and sell stocks or cryptocurrencies. Second, there is net interest revenue, which is the interest it earns on the cash it holds in bank accounts on behalf of clients (as well as its own cash).

Transaction revenue reflects the performance of Robinhood's core business. During the third quarter of 2024 (ended Sept. 30), the company's transaction revenue came in at $319 million, which was the lowest level of the entire year (pending its fourth-quarter result, which is due for release on Feb. 12).

The result was also still below its quarterly peak of $451 million from 2021. Simply put, despite all the enthusiasm in stock, crypto, and options markets last year, Robinhood's core business is still smaller than it was at the height of the COVID-19 pandemic.

A significant decline in its user base is a key reason why. During Q3 2024, Robinhood had 11 million monthly active users, down by almost half from its peak of 21.3 million in mid-2021.

Since many of Robinhood's younger clients enjoy making speculative bets using risky financial instruments like options, they tend not to be very sticky. In other words, once they inevitably lose money, they leave the platform -- and it appears that many of them don't come back.

That brings me to a very important point. The recent rally in Robinhood stock seems to be driven by speculation that its upcoming Q4 results -- and its results going forward in 2025 -- could show a significant improvement because of the surge in trading activity after the U.S. presidential election on Nov. 5.

The early signs are promising. Robinhood's monthly metrics report for November showed a whopping 780% year-over-year increase in crypto trading volume, and a 178% jump in stock trading volume. However, Robinhood's track record suggests this is more likely to be a temporary blip rather than sustainable growth.

When a brutal bear market struck the crypto industry during 2022 and 2023, Robinhood's transaction revenue from cryptocurrencies, specifically, plummeted by 90% (from peak to trough). They went from $233 million in second-quarter 2021 to just $23 million in Q3 2023. There is nothing stopping that from happening again in the future.

Image source: Getty Images.

A major source of Robinhood's revenue is a metaphorical melting ice cube

This is yet another reason I'm bearish on Robinhood stock. Net interest revenue currently makes up almost half of the company's total revenue, and there is no way to prevent the steep decline that might be around the corner.

At the end of Q3 2024, Robinhood was holding $4.4 billion in cash on behalf of its clients, in addition to $4.8 billion of its own cash. That money is stored in accounts with select banks, where it earns interest. Additionally, Robinhood earns interest on the $6.8 billion in margin loans currently held by its clients, which they use to buy stocks and other financial assets.

Between March 2022 and August 2023, the Federal Reserve hiked the federal funds rate (overnight interest rates) from 0.1% to 5.33%, which was one of the fastest increases in history. That was great news for Robinhood, since storing and lending money is such a big part of its business.

During Q3, Robinhood's net interest revenue came in at $274 million. If you recall, that's almost as much as the company generated from processing client transactions. That might be bad news, because the Fed cut interest rates in September, November, and December last year, and it's forecast to cut rates at least two more times in 2025.

That means a major source of Robinhood's revenue is about to steadily dry up, and there's very little the company can do about it.

Why Robinhood stock could plunge by 50% (or more)

Robinhood stock looks incredibly expensive following its surge over the last 12 months. It currently trades at a price-to-sales (P/S) ratio of 18.4, which is more than double its average of 8 dating back to when the company went public in 2021.

HOOD PS Ratio data by YCharts.

To put it another way, Robinhood stock would have to plunge by around 56% just to align with its long-term average P/S ratio. Alternatively, the company could grow its revenue, which would organically shrink the ratio (assuming its stock didn't climb any further).

According to Wall Street's consensus forecast (provided by Yahoo), Robinhood could generate $3.3 billion in revenue in 2025. If that proves to be accurate, the stock is trading at a forward P/S ratio of 13.4 -- which means it still faces a potential downside of 40% this year to align with its long-term average.

Even analysts are having trouble justifying the recent surge in Robinhood stock. According to Benzinga, Wall Street has a consensus price target of $41.25, which implies that the stock could sink by 17% over the next 12 to 18 months. But it gets worse. The lowest analyst target is $11, suggesting that the stock could plummet by 78%.

Considering the long-term headwinds Robinhood faces, including a shrinking user base and falling interest rates, I think investors should avoid chasing the rally in its stock at all costs.

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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.