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Robinhood tumbles on earnings miss as crypto trading declines

Shares of Robinhood sink as third quarter earnings miss expectations. JMP Securities Senior Research Analyst Devin Ryan joins Yahoo Finance Live to discuss.

Video transcript

AKIKO FUJITA: Welcome back to Yahoo Finance Live. We are watching shares of Robinhood just getting punished in this session, down nearly 10%, dipping well below that IPO price of $38 a share, this coming on the back of the trading platform's quarterly results. They missed on the top and bottom lines, largely dragged down by a slowdown in crypto trading. We saw total revenue coming in at $365 million, but out of the transaction-based revenue, less than a fifth of that came from crypto trading.

Let's bring in Devin Ryan, JMP Securities senior research analyst. Devin, it's good to talk to you today. You know, in many ways, Vlad Tenev had kind of messaged this, even before they went public, to say that peak that we saw in January from GameStop, and then, of course, in the second quarter, the company would struggle to keep at those levels moving forward. Why do you think we're seeing such a sell-off on the back of that, given that that was pretty well messaged?

DEVIN RYAN: Yeah, you know, you're right. It was well messaged. And I think Robinhood is a name where there's always excitement around it, right, in all directions. And so you're seeing that again today. But the reality is, yeah, third quarter shouldn't be surprising to people. Very seasonally slow quarter typically. Actually, trading results that they reported were less than a percent away from our model, so, really, on top of what we had had been thinking because we were looking at the data around equities and also around crypto.

And, you know, Dogecoin was a huge driver of activity in the second quarter. That dropped precipitously in the third quarter. And the reality is is that the first half of activity wasn't sustainable. I don't think many people thought it was sustainable. But your Robinhood rode the roller coaster up, I think, higher than some others. And so they're coming down a little bit more in the third quarter.

The bigger question, and I think we're talking to investors and our clients about, is, what's the outlook going forward? You know, everyone's trying to understand what does normalization and trading look like? Where are people going to engage, whether it's in equities or crypto? And what does that imply for both activity, new user account growth, and then, longer term, you know, the story around kind of the development of other products and services.

So that's where I think people are focused, but the fourth quarter guidance, I would argue is a little bit disappointing. And so then it's a question of was that conservatism because they don't want people out over their skis like they were in the third quarter, for whatever reason, or are they actually truly seeing maybe something different in their customer cohort, where the things are going slower? I think it's the former, that they're being conservative and that the environment potentially could be decently better as the quarter progresses. But that's something that has to play out here.

ZACK GUZMAN: Yeah, out over their skis is a fair way to categorize it, I think, here because the miss was rather large, $364.9 versus $423 million. I mean, it's a big gap there in terms of where the Street was. But when you look at, I guess, overall funded accounts, too, when we're talking some of that Doge boost there, actually down from the prior quarter to 22.4 million.

I mean, when you think about maybe catalysts out there, right, and we've been hearing maybe a few in terms of drawing back the retail crowd, which Robinhood is much more dependent on, I mean, you got Shiba Inu coin out there potentially. And you got their wallets coming, which I think is actually a service that could boost some maybe crypto native users. So I mean, how important is that to look ahead to those Q4 numbers?

DEVIN RYAN: Yeah, so I think Shiba is a good example. You know, they haven't launched that yet. I think it's something that's probably being looked at. You know, you look at Coinbase as an example. Over the last 24 hours, I think Shiba was like 25% of their volume. So, you know, it could be material. I think the company has to think about what coins they want on the platform and why. But bigger picture, you know, the crypto opportunity even at Robinhood is more than just trading individual coins.

And I think you just hit on the head, kind of the important point. You know, as they watch this wallet in the coming weeks, you know, that's going to open the door to a lot more connectivity into the crypto ecosystem. And I think there's going to be a lot of other product launches around that. And none of those are modeled. None of those are in, I think, the valuation.

And so that's the opportunity with Robinhood. Clearly, trading is important today. It's going to ebb and flow. It was quieter in the third quarter. But the bigger picture here is, what type of connectivity do they get launching new products? 25% of their clients are now using their cash management product, tremendous momentum on their IPO access product. They're rolling out other products like fully paid securities lending over time in ROTH retirement accounts. And there's numerous more.

And so I would just say that this past three months, slower trading activity, it was the most active three months of new product development that Robinhood's ever had. And that's, to me, the bigger picture, but it's kind of that near-term versus long-term dynamic if people only care about the short-term volumes.

AKIKO FUJITA: So, Devin, you've got a $58 price target on the stock. It's trading at $35 a share right now. Those new products that you just alluded to right now, is that what's going to get you to that number?

DEVIN RYAN: Yeah, I mean, the reality is, is that this is not going to be a smooth line. It never is. And again, kind of goes back to trading is inherently volatile. It's inherently tough to predict. And, you know, Robinhood stock is going to have some correlation with that, and you're going to have the ebb and flow of good quarters of trading and more active.

And by the way, the social media connectivity that we saw in the first half of the year in that retail community that came together, those are one-time things, you know. They're hard to predict, but I think that the trends that drove that GameStop and Dogecoin, they continued today, and they're going to be with us. Your social media and financial services are interconnecting in a way that we haven't seen before. And so, tough to predict, but that's part of it. There's going to be more activity. There's going to be more users over time because the base line is moving higher.

But then, yes, I do think that they will be able to add more products and services. They have 22 and 1/2 million customers today, which is many more than the majority of their peers. They have a huge balance sheet, which is underappreciated, so a lot of cash to either invest in new growth or actually do even sizable M&A that no one's modeling. And so, I like to think about these disruptive platforms as people are looking at what they know, and that's how they're valuing them and how they're modeling them.

And the reality is, there's going to be a lot that's launched here over the next six months to a year that we're probably not even thinking about today or is not in our model. And so, that's optionality here and probably even above and beyond the way we're thinking about it. So it's not going to be a smooth line, but we feel good about the longer term trajectory of what they're doing.

AKIKO FUJITA: Yeah, a lot of potential catalyst catalysts in the pipeline. Devin, appreciate you stopping by today. Devin Ryan, JMP Securities senior research analyst.