By Hannah Lang

(Reuters) – Robinhood Markets Inc (NASDAQ) was a household name before its spectacular IPO in 2013. Retail investors used the trading app to propel shares of GameStop and other “meme stock” stocks into the stratosphere. However, name recognition hasn’t helped Inc’s share price recently.

“The market is not being very patient with them,” said Greg Martin, co-founder and managing director at Rainmaker Securities, a brokerage specializing in private company deals.

Waning investor interest in retail trading has weighed on shares of the commission-free online brokerage, which saw explosive growth at the beginning of 2021 as retail investors gobbled up viral stocks https://www.reuters.com/article/us-retail-trading-robinhood-anger/robinhood-is-new-eye-of-gamestop-storm-as-outrage-grows-idUSKBN29X33D including GameStop and AMC Entertainment (NYSE:). Robinhood’s active monthly users increased from 11.7 million to 21.3 millions at the close of 2020, to the closing of June 2021.

California-based Robinhood achieved a valuation of $31.8 billion on its initial public offering https://www.reuters.com/business/finance/robinhood-gateway-meme-stocks-raises-21-billion-ipo-source-2021-07-28 in July. However, it’s fallen from its 52 week high and ended Wednesday lower by 85%.

In addition to smaller trading volumes, analysts cited regulatory scrutiny of Robinhood’s main source of revenue: order flow it sells to market makers.

“They’ve got a global brand, which they basically did with zero marketing. Martin stated that they now need to generate more sustainable long-term revenue streams.

Robinhood must find a way for its shares to rise, or else it will be a target of a takeover.

Robinhood declined comment but stated it continued to attract customers through the addition of new products and features. It expects that this trend will continue. On Thursday, the company that offers options for trading in stock and crypto currency will release its fourth quarter results.

Robinhood is yet to earn a profit in public companies, as many start-ups are doing. Its two quarters https://www.reuters.com/technology/robinhood-revenue-more-than-doubles-crypto-trading-boom-2021-08-18 of results have so far disappointed investors.

Robinhood saw modest increases in revenues due in part to the rise of crypto trading over the second quarter. The stock trading volume has declined from the peak levels seen last year during the trading frenzy. This was partially offset by an increase of options volumes.

Robinhood’s revenue per user increased to $65 from $137 during the first quarter 2021.

Analysts agree the company must expand its offerings to survive in a crowded space, especially if U.S. stock prices fall further from record highs as expected with the Federal Reserve preparing to raise interest rates https://www.reuters.com/business/finance/inflation-fighting-fed-likely-flag-march-interest-rate-hike-2022-01-26.

Chaim Siegel is the founder of Elazar Advisors and heads U.S equity research. He called rising interest rates “a major threat.”

“So many high-flying, no earnings or low-earnings companies have just been hit very hard in the last two months,” said Siegel, who downgraded Robinhood to neutral in August.

Investors sold stock shares last week as they struggled to deal with changes in Fed policy and tensions between Russia and Ukraine. Wall Street posted its biggest weekly decline https://www.reuters.com/markets/europe/global-markets-wrapup-1-2022-01-26 since early in the pandemic in March of 2020.

Investors will likely move to safer investments, which could mean that many investors may reduce their positions in crypto or stocks. That could mean less trading for retail investors, the core of Robinhood’s customer base.

“A ton of them are going to lose money, then lose interest,” said Jeff Tomasulo, chief executive officer of Vespula Capital Management.

According to Securities and Exchange Commission data, retail trading volume reached its peak in January 2021. It accounted for nearly 27% U.S. stock trade volume. The retail volume of trading had fallen to 21.42% in November from the total volume.

SEC CRACKDOWN

U.S. Securities and Exchange Commission is currently examining whether or not to ban payment for orders flow (PFOF) in which brokers route trades towards wholesale market makers for a fee.

Robinhood received nearly 75% from PFOF or other transaction rebates during the third quarter 2021.

Although it stated that it doesn’t expect the SEC ban this practice, it expressed confidence that it can find other revenue streams, such as internally executing client orders.

Martin, Rainmaker Securities, stated that the SEC threat is still a “overhang” to the stock.

Robinhood offers its customers an opportunity to invest in IPOs, as it seeks to increase its revenue streams beyond transactional sales. Robinhood has discussed retirement accounts and has already tested a wealth management tool.

Robinhood shareholders want the company to reduce its spending. This would limit Robinhood’s ability to provide new products. It also has to deal with the fines that were imposed by last year’s meme stock frenzy.

Robinhood’s legal expenses jumped from https://www.reuters.com/technology/regulatory-legal-headwinds-facing-robinhood-2021-07-02 $1.4 million in 2019 to $105 million in 2020, according to its IPO filing. Other financial firms https://www.reuters.com/markets/us/big-us-banks-see-higher-expenses-workers-rising-wages-2022-01-19 have also been pinched by upward pressure on labor costs.

Tomasulo indicated that the market is likely to remain patient.

“There’s not many brokers out there like Robinhood, so I can see as Robinhood gets cheaper and cheaper, this becomes a really good takeover target.”