Should You Buy Robinhood While It's Below $120?

Robinhood (NASDAQ: HOOD) has quickly become one of the most popular apps for buying and selling stocks and cryptocurrencies. Over the past three years, its share price has soared 1,100%.

Those gains have come from a combination of business growth and market optimism. But with its share price soaring over the past few years and some investors increasingly concerned that some pockets of the market -- like artificial intelligence (AI) -- are riding too high, is now the right time to buy Robinhood? Here's why it might be better to hold off on buying shares of the company while its stock is under $120.

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What Robinhood is doing well

Robinhood burst onto the investment platform scene about four years ago, introducing a user-friendly app that helped lower the barrier for retail investors to buy stocks without paying a commission.

Part of the appeal of the platform to younger users was that it made buying and selling stocks seem much easier and cheaper than the traditional brokerage apps and investment banks. This approach has worked wonders for Robinhood, and in the third quarter (which ended Sept. 30), the company's sales rose 100% to $1.3 billion, and its non-GAAP (adjusted) earnings spiked 259% to $0.61 per share.

What's more, the company's user base continues to expand as well, with Robinhood now boasting 26.8 million users -- up 10% from the same time last year -- and average revenue per user (ARPU) spiked 82% to $191. By all of these measures, Robinhood's business is doing well, and its share price is rising as a result of the company's growth.

A few reasons to be cautious about Robinhood right now

But despite how well Robinhood's top and bottom lines are doing, there are a couple of reasons why investors should be cautious about buying the stock right now.

First, some of the company's sales growth has been fueled by speculation in the crypto market. Cryptocurrencies have surged in value over the past few years, and while there's nothing wrong with owning some cryptocurrencies in your portfolio, their prices tend to rise and fall dramatically.

That might be problematic for Robinhood, considering that the company generates most of its sales -- $730 million in the most recent quarter -- from transaction-based revenue. And those transactions have been fueled, in part, by a 300% increase in cryptocurrency trading. What's more, Robinhood's management says the rest of the growth has come from options trading, which is also an inherently riskier investment strategy.

All of which means that two primary drivers of Robinhood's sales growth right now rely on everyday investors making risky investment decisions.

Furthermore, Robinhood's trading platform has only been in existence during a booming bull market. The S&P 500 has surged 50% higher since the company's initial public offering (IPO). When the market eventually enters a bear market, or even takes a breather, Robinhood's stock will likely feel the effects.

Don't buy Robinhood stock right now

I think the reasons listed above are enough not to buy Robinhood's stock right now. I don't think it's problematic to have the stock in your portfolio over the long term, but buying it now after its massive run-up may not be a great decision.

More importantly, some economic data is already beginning to indicate there's a slowing job market, with layoffs in October reaching the highest for that month in 22 years. Cryptocurrency prices have also started to retreat recently as some investors look for less risky investments.

If more data emerges indicating that the economy is not performing as well as initially thought, investors will likely pull back further on their stock and crypto buying, which could lead to some challenging times for Robinhood.

Chris Neiger 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.