Shares of Robinhood Markets (HOOD) traded near $118, down about 2% on the day but up roughly 11% over the past week, as investors digested just how quickly the company’s newest business line is scaling — and how regulators are responding.

That business is event contracts, Robinhood’s version of prediction markets. Customers buy contracts that pay $1 if they correctly guess an outcome — an election result or a football game, for instance — and nothing if they are wrong.

In the second quarter, event contracts generated $156 million in revenue, more than 10 times what the line produced a year earlier. For context, options revenue grew 29% year over year, equities revenue jumped 95%, and crypto revenue fell 38%. Nothing else at Robinhood is growing at a comparable pace.

The surge underscores how quickly prediction markets have moved from novelty to a core revenue driver for the retail brokerage, even as the category faces a widening set of legal challenges across several states.

Prediction Markets Now Rank Number Two

A year ago, event contracts were the smallest of Robinhood’s trading revenue lines. They now rank second, with only options bringing in more.

The company traded 13.6 billion contracts in the second quarter, more than 10 times last year’s volume. Daily activity accelerated further into the summer: customers were placing about 152 million contracts per day in August alone, a pace 14 times the year-ago level.

That growth hasn’t gone unnoticed. Jim Cramer has praised the business, along with Robinhood’s newer Gold Card, which offers 3% cash back, calling the company “on a major roll.” (Yahoo Finance)

Robinhood’s broader second-quarter numbers back that up. Net deposits hit a record $22 billion, platform assets rose 32% to $369 billion, and Gold subscribers grew 39% to 4.8 million. Thirteen separate business lines each generated more than $100 million in revenue during the quarter — a wide spread for a company once known almost entirely for commission-free stock trading.

The Legal Picture Gets Messier

Growth this fast tends to attract scrutiny, and Robinhood’s prediction markets are no exception. Plaintiffs in six states have sued to recover losses under state gambling laws, and Native American tribes have sued over sports contracts offered on their lands. In late August, a federal appeals court sided with two tribes, finding they are likely to prevail on their claim. The same court cleared Nevada to apply its gambling laws to Robinhood’s sports contracts.

Missouri’s attorney general went further, ordering Robinhood and five other operators to stop offering sports contracts in the state entirely. Massachusetts securities regulators are also examining the offerings, according to Robinhood’s latest filing. The company itself cautions that new laws could force it to pull event contracts altogether. With the product now the company’s second-largest trading revenue line, the rulings and reviews still ahead carry direct weight for the fastest-growing business Robinhood operates.

Momentum showed signs of cooling in August, with volume falling 23% from July. Even so, at the second quarter’s revenue-per-contract rate, the business would still generate roughly $650 million on an annualized basis.

Robinhood is leaning further into the space regardless. In January, a joint venture with Susquehanna International Group acquired 90% of MIAX Derivatives Exchange, a regulated derivatives exchange and clearinghouse — infrastructure that takes on added significance while the category’s legal footing is tested across multiple jurisdictions.

Valuation and Companywide Results

HOOD trades at roughly 42 to 45 times forward earnings, well above Interactive Brokers at 28 and Charles Schwab at 12.8. Short interest sits at 4.62% of the float, higher than both peers. A premium that wide means the stock is valued on expectations that the newer businesses keep delivering — expectations the unresolved legal questions could test.

Companywide, Robinhood posted record revenue of $1.31 billion in the second quarter, up 32% year over year, with net income climbing 48% to $573 million. Roughly 36% of total revenue still depends on equities and options, a reminder that the company’s push into new lines has not yet displaced its original trading engines.

Source: CoinCentral