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China is cracking down on crypto again, and cryptocurrency prices are falling.
Robinhood depends on popular crypto trades for much of its revenue growth.
Robinhood Markets (NASDAQ: HOOD) stock tumbled 7.1% through 10:35 a.m. ET Monday, and I can explain the reason why to you in three words (and three tickers). They are:
Image source: Getty Images.
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On Friday, the People's Bank of China warned of "a resurgence in speculation" in cryptocurrency and "vowing to crack down on illegal activities involving" stablecoins, as Reuters reports. Crypto investors reacted swiftly by selling off their holdings, and this morning, Bitcoin prices fell more than 6% to less than $86,000, while Ethereum prices dropped 7% and Solana slid 8%.
CNBC notes that many crypto investors may have used leverage to increase their profits on crypto's way up -- and that may be accelerating the crash and crypto heads back down.
And why is this bad news for Robinhood, you ask? Well consider what Robinhood said in its Q3 earnings report released last month: "Transaction-based revenues increased 129% year-over-year to $730 million, primarily driven by cryptocurrencies revenue of $268 million, up over 300%" (emphasis added).
Robinhood's growing quickly in general, with quarterly revenue from stock trading up 132% year over year, and options trading revenue rising 50%, true. But crypto trading is driving the bulk of Robinhood's revenue growth, and if investors start to get spooked about crypto, then a lot of that trading could stall.
And Robinhood's growth rate would take a hit.
What would that mean for Robinhood stock? Consider that since Robinhood shares cost more than 50 times trailing earnings, any growth rate over 50% is probably enough to make the stock "a buy."
If a crypto panic slows down Robinhood, however, the stock could quickly become a sell.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and Solana. The Motley Fool has a disclosure policy.
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