Shares of Robinhood got crushed on Wednesday following a worrisome earnings report from the newly public brokerage.
Robinhood shares plummeted 10.4% to end the day at $35.44 per share, dipping below the stock trading app's IPO price of $38 per share.
The decline came after Robinhood missed on the top and bottom lines of its third quarter results. Revenue was dragged down by a slowdown in crypto trading and Robinhood warned that the headwinds in trading will persist into year-end.
For the third quarter, total net revenue came in at $365 million, missing a Refinitiv estimate of $431.5 million. This was well below the second quarter's revenue of $565 million, which was bolstered by a massive surge in crypto trading.
Third-quarter transaction based revenue totaled $267 million, with only $51 million coming from cryptocurrency trading. Revenue from crypto trading totaled $233 million in the second quarter, helped by interest in meme-inspired dogecoin.
The second quarter was "one of those idiosyncratic market events where there's this massive interest specifically in Doge," Robinhood CFO Jason Warnick told CNBC. "We love it when those moments happen. It's a great way to bring a lot of new customers onto the platform but we're really thinking about investing in crypto over the long term. It's gonna be impossible for us to accurately predict...revenue on a quarter-to-quarter basis."
And it may be harder for the brokerage app to ride the next hot crypto coin like Doge if one should get hot before year-end. Robinhood CEO Vlad Tenev said on the call the company is going to wait for regulatory clarity on crypto before adding more digital coins to the platform. The brokerage currency currently offers seven coins.
Robinhood reported a net loss of $1.32 billion, or $2.06 per share. Wall Street was expecting a loss of $1.37 per share, according to Refinitiv.
The company also saw a slowdown in user growth. Monthly active users totaled 18.9 million, down from 21.3 million in the second quarter.
"We question the ability of the company to generate competitive margins over time given the focus on
such small accounts that have limited room to be profitable," JPMorgan analyst Kenneth Worthington told clients.
The brokerage also gave a bleak outlook for the rest of 2021. Robinhood said it expects fourth-quarter revenue no greater than $325 million. The company sees account growth in line with the 660,000 accounts opened in the third quarter of 2021.
"We wanted to be what we felt was appropriately conservative for our revenue guidance, particularly due to the fact that we are facing seasonal headwinds and lower year-over-year volatility," Warnick said on the earnings call.
Goldman Sachs said the fourth quarter guidance appears more conservative than previous market expectations and could set the company up for a lower bar in future quarters.
"At the end of the day, trading oriented brokerage revenues are difficult to forecast, and Robinhood has largely grown in bursts and step functions over time rather than in a straight line," Goldman Sachs analysts Will Nance told clients. "Longer term investors will likely still look towards the company's impressive track record for user acquisition and its significant optionality from higher user monetization and more recurring revenue streams in the future."
On the earnings call, Robinhood management described the quarter as one without a major market event, like GameStop trading in the first quarter and the rise of Dogecoin in the second quarter.
"We've decided as a company to be cautious about chasing growth with marketing dollars," said Warnick. "You can always spend more to get more customers but what we've see is you tend to get lower-intent customers at worse economics."
Robinhood is also entering the home stretch of its lock-up period, which will be over by December 1.
Starting Wednesday, half of tranche I convertible notes are coming unlocked as well as some employee shares, which totals about 62 million shares. On November 10, the other half of tranche I will be tradable and on December 1 all shares will be fully tradeable.
— with reporting from CNBC's Kate Rooney and Michael Bloom.