Why Robinhood Stock Lost 13% in November

Shares of investing platform Robinhood Markets (NASDAQ: HOOD) dropped 13% in November, according to data provided by S&P Global Market Intelligence. The company reported excellent third-quarter results, but it's been highly reliant on cryptocurrency trading, and many high-profile cryptocurrencies have been falling recently.

More than meme stocks?

Robinhood has evolved from a marketplace for speculative stock investing to a platform for...other types of speculative investing, while also expanding into more traditional financial services, which provides it with greater stability. Today, it has a growing list of products, including cryptocurrency trading, credit cards, and a membership club. It has also become highly profitable.

The third quarter results, at first glance, were outstanding. Revenue doubled year over year, and net income was up 271%. However, it added only 2.5 million new funded customers, a 10% year-over-year increase, to reach 26.8 million. That's not a huge increase, by number or percent, for a high-growth company. It did add 1.7 million new Gold members, a 77% increase, and this is a group with strong engagement. They also pay $50 annually to be in the club, which is a revenue booster.

Another notable aspect is the significant contribution of cryptocurrency trading to the company's growth. Sales from cryptocurrency trading increased 300% year over year in the quarter to $268 million. Options trading revenue was up 50% and accounted for nearly half of total transaction revenue of $730 million, and equities trading increased 132%, but was only $86 million.

Robinhood has been launching new products in new regions at a rapid pace, like shorting and Robinhood Social, a platform for investing discussions. One of its major goals is to add more cryptocurrencies.

Bull markets and speculative investments

Robinhood stock has crushed the market over the past few years as its business has exploded. It's up more than 1,000% over the past three years, while the S&P 500 is up only 75%. Investors have been excited about its performance and opportunities.

However, Robinhood stock has become quite expensive, trading at a P/E ratio of 52. That means there's little room for error. What happened in November is that many large cryptocurrencies dropped, and since cryptocurrency makes up a significant part of the company's business model right now, that's concerning. More practically, lower trading could mean lower revenue.

Robinhood is doing a good job of diversifying its business and leveraging its platform to perform well in a bull market. However, there's risk, as it currently relies on strong trading activity and riskier asset classes.

Jennifer Saibil 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.