Why Robinhood shares crashed on Wednesday

Warnings of slowing growth alarmed investors.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

What happened

Shares of Robinhood (NASDAQ: HOOD) sank 10.4% on Wednesday after the online brokerage's third-quarter financial results disappointed shareholders amid a shortfall in cryptocurrency trading volumes.  

So what

Robinhood's revenue rose 35% year over year to $365 million. That was well below Wall Street's expectations for revenue of $431.5 million. It also represented a sharp decline from the $565 million in revenue Robinhood generated in the second quarter. 

Worse still, monthly active users declined 11% sequentially, to 18.9 million. 

Robinhood said the declines were due in part to a downturn in cryptocurrency-related trading activity. The company's crypto transaction-based revenue fell to $51 million, down from $233 million in the second quarter. 

"Looking back at Q2, we saw a huge interest in crypto, especially doge [Dogecoin (CRYPTO: DOGE)], leading to large numbers of new customers joining the platform and record revenues," CEO Vlad Tenev said during a conference call with analysts. "In Q3, crypto activity came off record highs, leading to fewer new funded accounts and lower revenue as expected." 

Now what 

Robinhood expects the muted trading activity to persist into year-end. In turn, management guided for revenue of no greater than $325 million in the fourth quarter and 2021 full-year revenue of less than $1.8 billion.

This muted forecast was unsurprisingly met with jeers from shareholders. Warnings of stagnating growth are often troublesome for premium-priced stocks. Robinhood, which is trading at roughly 20 times sales, might be priced for much greater growth than its new guidance suggests it can deliver. Investors are now resetting their expectations -- and driving Robinhood's stock price down in the process. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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