The latest addition to the S&P 500 is outperforming both Nvidia and Palantir this year. Has the opportunity to invest already passed?

The S&P 500 ( ^GSPC 0.43%) consists of 500 companies spanning 11 sectors of the economy. To qualify for inclusion, companies must meet several requirements, such as maintaining a market cap of at least $22.7 billion and demonstrating profitability. However, even after meeting these standards, a dedicated committee ultimately selects which companies are added to the index.

The S&P 500 undergoes a quarterly rebalancing, which means stocks that no longer fit the criteria are swapped out for more appropriate candidates. The latest adjustment took place on Sept. 22, when Caesars Entertainment was replaced by Robinhood Markets ( HOOD -3.21%), the operator of a widely used online trading platform.

Robinhood shares have soared 208% so far this year, far outpacing the returns of AI giants Nvidia and Palantir Technologies, which have gained 28% and 136%, respectively. That’s an impressive rally for Robinhood. But does this mean investors have missed their chance? Let’s take a closer look.

Worrisome signs are appearing in Robinhood’s main business

Robinhood’s total revenue is made up of two main segments:

1. Transaction revenue, generated from facilitating trades in stocks, options, and cryptocurrencies for its users.
2. Net interest revenue, which comes from interest earned on Robinhood’s own cash as well as client funds held on the platform. The company also collects interest from margin loans used by clients to invest in various assets.

Transaction revenue is the key driver, as it reflects the health of Robinhood’s core operations. After Donald Trump’s victory in last November’s election, trading activity surged—especially in cryptocurrencies—thanks to his promises of deregulation and pro-growth policies. This shift proved to be very beneficial for Robinhood.

During the fourth quarter of 2024, Robinhood’s transaction revenue reached a record $672 million, with $358 million coming from crypto trades. However, the post-election boost faded quickly—by the second quarter of 2025 (ending June 30), transaction revenue had dropped 20% to $539 million, and crypto transaction revenue plunged 55% to just $160 million.

With many leading cryptocurrencies losing value, investors are becoming more cautious. Dogecoin has fallen 51% from its 52-week high, Shiba Inu is down 63%, and XRP has dropped 24%. Even Bitcoin is trading about 11% below its peak.

This isn’t the first time Robinhood’s crypto segment has experienced a steep decline. In the second quarter of 2021, crypto revenue skyrocketed by 4,560% and made up half of all transaction revenue. But by the same quarter in 2022, crypto revenue had fallen 75% from that high.

The disconnect between Robinhood’s falling revenue and its soaring share price could spell trouble for shareholders—more on this in a moment.

Declining interest rates may pose another challenge

The U.S. Federal Reserve lowered the federal funds rate three times in the last months of 2024, and again on Sept. 17, marking its first cut of 2025. Normally, falling rates would put pressure on Robinhood’s net interest income, but this has been offset by a sharp rise in margin loans and client cash balances.

By the end of the second quarter, Robinhood clients held $8.7 billion in cash on the platform—almost double the amount from a year earlier. The company’s margin loan portfolio also hit a record $9.5 billion.

Consequently, net interest income for the second quarter climbed 25% year over year to $357 million. Still, it’s unlikely that growth in margin loans and client cash will continue to outpace falling interest rates indefinitely.

A market downturn, for instance, could cause margin loan balances to shrink as investors reduce risk. Additionally, in the event of a recession, clients might withdraw cash from their accounts to cover everyday expenses.

Robinhood shares may be due for a significant pullback

Robinhood’s remarkable 208% rally this year, combined with declining revenue, has pushed its price-to-sales (P/S) ratio up to 30.8—three times its average of 10.2 since its 2021 IPO. This kind of multiple expansion is rarely sustainable for long.

Data by YCharts; PS = price to sales.

Unless Robinhood can generate substantial revenue growth, its stock could be headed for a steep drop. It would need to fall by 67% just to return to its historical average P/S of 10.2—a scenario that’s not far-fetched, given that the stock lost over 80% of its value after the last crypto surge in 2021.

Robinhood’s monthly active users declined in both the first and second quarters this year, making it even harder to grow revenue with fewer traders on the platform. As a result, buying Robinhood shares now may not be wise, and current shareholders might consider locking in some profits.