Robinhood Markets (NASDAQ:HOOD) has had a rough several months. Since Oct. 26, when the company released its third quarter results, HOOD stock has fallen from $39.57 to, as of Jan. 7, $15.75. That represents a decline of just over 60%.
One possible reason for the decline is that the company posted a down quarter in terms of revenue growth and earnings compared to last quarter. But the more likely reason is that crypto trading was a big portion of its revenue in the second quarter. And the cryptocurrency market hasn’t exactly being doing very well lately.
As a result, HOOD stock seems to be highly correlated to the price of cryptocurrencies in general.
Where Things Stand at Robinhood
Now, as seen in its latest earnings for the third quarter released on Oct. 26, crypto transactions fell dramatically compared to the prior quarter. For example, cryptocurrencies in Q3 were much lower than the prior quarter. Here is what the company said about this:
“Crypto activity declined from record highs in the prior quarter, leading to considerably fewer new funded accounts, a slight decline in Net Cumulative Funded Accounts, and lower revenue in the third quarter of 2021 compared with the second quarter of 2021.”
Revenue fell from $565 million in Q2 to just $365 million in Q3. Moreover, cryptocurrency revenue fell from $233 million in Q2 to just $51 million in Q3. That is a dramatic drop in crypto trading, just as the company said. It seems that Robinhood desperately needs a huge increase in crypto trading to make good money.
As a result, don’t expect HOOD stock to rise anytime soon unless it becomes clear that crypto trading is rebounding. For example, the stock has continued to drift down all during the quarter as it became clear that all the major cryptos were faltering.
For example, since Oct. 26, Bitcoin (CCC:BTC-USD) has gone from $60,243 on Oct. 26 down to just $41,641 as of Jan. 7. That is a tumble of $18,602 for the largest cryptocurrency out there — a 44.7% decline.
In addition, Ethereum (CCC:ETH-USD) is down from $4,241 on Oct. 26 (when earnings were released) to just $3,169 as of Jan. 7. This represents a drop of 25.3% during this period.
Where This Leaves HOOD Stock
There is simply no way that HOOD stock can rise during such a terrible storm for cryptocurrencies. And this goes a long way to explaining the 60% decline in HOOD stock.
In fact, what we can conclude from this is that Robinhood acts more like a leveraged option on the direction and performance of cryptocurrency prices. Its gains and losses will be greatly magnified compared to the performance of cryptos.
By the way, this works on the upside too.
Once crypto prices start to rebound, you can expect to see HOOD stock skyrocket. The reason is that the company can be expected to pick up new accounts, many more transactions than usual, and most of those will be with cryptos. That will make Robinhood very profitable and the market will move quickly to push up the stock as a result.
In essence, investors want to be the first ones to get in on the bonanza, when it happens.
What To Do With HOOD Stock
Analysts don’t really have a clue what to recommend on this stock. The average analyst surveyed by Seeking Alpha has a price target of $37.38. That represents a potential upside of 137% over the price today. It also represents a rebound to where the stock was around Oct. 26 when Q3 earnings were released.
But what do these analysts know about crypto price trends more than anyone else? Not much.
If anything, they are going to be behind the curve and be more reactive to prices than anticipatory.
For that reason, it probably means that now is a good time to begin accumulating some HOOD stock shares. By the time it’s apparent that crypto prices are rising, the price of Robinhood stock will be significantly higher. You won’t be able to get in at a good price.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.