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The S&P 500 (^GSPC -0.64%) is off to a bumpy start to 2025. It was down by as much as 15% year to date in April, but it has since staged a recovery and trimmed the loss to 4%. The volatility was triggered by President Donald Trump's "Liberation Day" tariffs, which investors fear might lead to an economic slowdown.
But Robinhood Markets (HOOD -1.24%) thrives on volatility. It operates a popular trading platform where investors can buy and sell stocks, options, futures, and cryptocurrencies, so large swings in the broader market can result in significant commission revenue for the company. As a result, Robinhood stock is up by 29% in 2025 so far, crushing the S&P 500.
However, cracks are starting to appear in one of Robinhood's biggest growth areas, so here's why I'm worried its stock could lose its recent momentum.
A repeat of 2022 might be on the table
The company breaks its revenue into two parts: transaction revenue, which is the money it earns from processing investment transactions for customers, and net interest revenue, which is the money it earns on cash sitting in the bank (its own cash and its customers' cash), and on margin loans.
Transaction revenue is more important, because it's the money Robinhood generates from its core business. During the first quarter of 2025, it came in at $583 million, which was a 77% increase from the year-ago period. The cryptocurrency segment was the single largest contributor to that figure, bringing in $252 million, which doubled year over year.
However, crypto transaction revenue was down 30% from the fourth quarter of 2024. Crypto prices plummeted in the early stages of 2025 as growing economic and political upheaval pushed investors into safer assets like cash. And most digital coins are susceptible to steep corrections because they simply don't have fundamental uses to support their value.
Robinhood experienced a similar boom -- then bust -- in its digital token business a few years ago. Its cryptocurrency transaction revenue soared by 4,560% year over year during the second quarter of 2021 and accounted for more than half of the company's total transaction revenue. However, the market frenzy quickly fizzled, and crypto transaction revenue was down by 75% just one year later.
I think a similar decline is very likely from here. All of the highly speculative coins and tokens that fueled its crypto business in 2021 were on the rise yet again in late 2024, including Dogecoin, Shiba Inu, and XRP. But each of them has headed south in recent months. Dogecoin, for instance, is down by 72% from its 52-week high.
Therefore, it's no surprise Robinhood's crypto transaction revenue plunge sequentially during the first quarter of 2025, and investors shouldn't be surprised to see further declines throughout this year.
There are some other headwinds, too
Robinhood earned interest on the $4.4 billion in cash it was holding on behalf of its clients, and on the $4.4 billion of its own cash during the first quarter. It also earned interest on clients' margin-loan balances outstanding, which were at a record high of $8.8 billion.
In total, the company's net interest revenue came in at $290 million in the first quarter, a figure that has mostly been little changed for the past year.
Declining interest rates are hurting Robinhood's ability to generate growth in this area. The U.S. Federal Reserve slashed the federal funds rate (the benchmark overnight interest rate) three times between September and December last year, and there could be as many as three more cuts during 2025 as inflation continues to decline. This is something the company simply can't control, but it will certainly weigh on net interest revenue.
As a result, the company's core business will become more important than ever in the coming quarters because it might have to offset declining interest revenue. That won't be easy if crypto transaction revenue also continues to shrink.
Robinhood stock isn't cheap right now
Following the 29% gain in the stock this year, it's trading at a price-to-sales ratio (P/S) of 13.7 as of this writing. That's a 63% premium to its long-term average of 8.4, dating back to when the company went public in 2021:
HOOD PS Ratio data by YCharts.
A company normally attracts a premium P/S when its revenue is growing at a rapid pace, and Robinhood certainly meets that criteria right now, given the 77% year-over-year surge in its transaction revenue during the first quarter of 2025. However, if history repeats and the crypto segment continues to suffer declines from here, it's going to weigh on the company's ability to generate growth. A further decline in interest rates will make that situation even worse.
Robinhood stock would have to decline by 38% just to bring its P/S back in line with its long-term average, and that outcome could be on the table if investors think the company is losing momentum.
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