Robinhood Made $173 Million From Prediction Markets Last Quarter, More Than From Crypto. Can That Carry the Stock?

Robinhood Markets (NASDAQ: HOOD) reported its third-quarter results after the market closed on Oct. 27, and performance in the period didn't thrill investors. The company reported non-GAAP (adjusted) earnings per share of $0.51 on sales of $1.42 billion, missing the average analyst estimate of earnings per share of $0.56 on sales of $1.43 billion. While the company's revenue was up 12% year over year to a new record high, earnings per share fell 3% from the prior-year period.

The market wasn't thrilled with the quarterly print, but there were some bright spots. Notably, sales from the company's prediction market ventures increased more than sixfold annually to reach $173 million. The big growth helped offset a substantial decline for the company's cryptocurrency segment, which saw sales decline 55% year over year to reach $120 million. Are event contracts now central to Robinhood's growth story?

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Prediction markets are red hot right now

The rise of prediction markets has occurred at an incredible pace, with service providers including Kalshi and Polymarket rapidly growing their user bases and commanding billion-dollar market capitalizations. Event contracts allow investors to bet on real-world outcomes in spheres including politics, awards show results, sports, and even the weather -- and participants can sell in and out of positions based on current market rates in much the same way that they would buy and sell stocks.

The popularity of prediction markets is exploding, and Robinhood's massive category revenue growth reflects how lucrative it can be to provide services in this category. Given the expansion trajectory for the company's event contracts segment, Robinhood's prediction market business looks poised to achieve an annual revenue run rate of more than $1 billion in the near future -- and it could still have room for big growth from there.

With the company's cryptocurrency segment seeing big sales declines, strong performance for the event contracts business is helping to smooth out performance and facilitate continued overall revenue growth for the overall business. On the other hand, there are still some significant risks associated with the rapidly ascendant prediction-market business.

The prediction market industry is still in its "Wild West" phase, and there's a real possibility the category will face a wave of new regulations in the not-too-distant future. Shifting regulatory dynamics could cause growth in the category to slow substantially or introduce higher expenses for operators, and there's even a risk that current operators of event contracts and adjacent services could wind up being hit with sizable fines at some point down the road.

Given recent trends in financialization, regulators may have trouble getting the toothpaste back in the tube with prediction markets -- but investors should understand that disruption risks exist for Robinhood's hot new business category. While the introduction of Robinhood's event-contracts business has been an undeniable boon to sales and earnings and could help carry the stock over the long term, there's still some uncertainty on that front.

Keith Noonan has no position in any of the stocks mentioned. The Motley Fool recommends Robinhood Markets. The Motley Fool has a disclosure policy.