Robinhood Stock Has Soared 65% From Its 52-Week Low. Here’s Why I’m Predicting Another Sell-Off.

However, history suggests it probably won’t be sustainable. Spikes in trading volume in speculative segments like options and crypto tend to be very short-lived, because they are not markets where clients consistently make money. Earlier this year wasn’t the first time Robinhood suffered a sharp drop in transaction revenue in the options and crypto segments — it experienced even steeper declines after the stock market and crypto bull markets of 2021 came to an end.

Robinhood’s valuation leaves little room for further upside

When the stock set its all-time high last October, its price-to-sales ratio (P/S) was more than 30, which was almost triple its long-term average of 11.8. That valuation simply wasn’t sustainable. But even though the stock is well off its highs, its P/S is still at an elevated level of 20.8.

That suggests Robinhood stock would have to decline by 43% just to trade in line with its long-term average P/S of 11.8. But that isn’t the worst part: Hypothetically, if the company’s overall revenue shrinks during the next few quarters like it did in the first quarter, then its forward P/S might actually be higher than its current ratio, meaning the stock is actually more expensive today than it appears at face value.

Although the company had a record 27.4 million clients at the end of the first quarter, just 13.5 million were actively engaging with the platform each month, which is still 36% below its peak of 21.3 million from the second quarter of 2021. Because many of its clients engage in risky options and crypto trading — where it’s very difficult to generate consistent profits — some will inevitably drop off over time.

As a result, I think Robinhood’s revenue will continue to be incredibly lumpy and unpredictable, as it has been since the company went public in 2021. That isn’t a recipe for sustained upside in its stock, especially from its current valuation.

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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.

Robinhood Stock Has Soared 65% From Its 52-Week Low. Here’s Why I’m Predicting Another Sell-Off. was originally published by The Motley Fool