Short selling

Is the Robinhood share price the ultimate meme stock?

The Robinhood [HOOD] share price officially hit meme territory when it topped the list of most mentioned stocks on Reddit’s WallStreetBets forum on 9 August, based on data from Swaggy Stocks.

This article was originally published on Opto – Invest in the Next Big Idea.

Frenzied trading had seen the Robinhood share price hit the $85 mark last week on 3 August before the stock closed at $70.39, representing a 50% upside on the day. Triggering the surge was Cathie Wood’s Ark Investment adding almost 90,000 shares to its ARK Fintech Innovation ETF [ARKF] at a closing price of $46.80 the previous day.

“It looks like ARK Investments took a big stake, and it would seem as though the retail traders are getting involved as well,” John Heagerty of Atlantic Equities said. Heagerty has a $65 price target on the Robinhood share price.

Having initially faltered on its debut, the Robinhood share price is up by more than circa 55% since its trading debut, having listed at $38 a share. Startlingly, at one point on 4 August, the stock had gained more than 100% on its debut price.

Robinhood share price behaves like a meme stock

The broker had been a major beneficiary from the ‘memeification’ of stocks. Day traders communicating in online chat rooms like WallStreetBets used the Robinhood app to send stocks like Gamestop [GME] and AMC [AMC]skyward, while institutions short selling lost millions. Robinhood can count itself among the meme-crowd as it becomes a favourite of the chat rooms. And like those meme stocks, along with the sharp gains, come hefty falls.

Having experienced a monster rally on 4 August, the Robinhood share price tanked 23% the next day after a group of investors filed with the SEC to sell 97.9 million shares over a period of time. The group had taken part in the $3bn convertible debt sale when the broker faced a margin call that would have crippled the business. Yet, when market’s reopened on 6 August, Robinhood’s stock surged 16%.

During last week’s fast-moving trading – so fast that Robinhood suspended trading its own stock on the app – CNBC’s Jim Cramer urged investors to use discipline.

“It doesn’t matter how much you love [Robinhood], discipline always trumps conviction, and discipline says you need to take something off the table when you’ve got an 80% gain in two days.”

Wolfe Research analyst Steven Chubak was blunter in a note to investors: “We cannot in good faith recommend investors get involved in HOOD on either the long or short side,” the analyst wrote. “There is “high ‘meme stock’ risk with outsized retail involvement.”

On 10 August, the stock saw more turbulence as Robinhood’s share price fell over 5% to close at $53.94, 36.5% below last week’s high.

Does Robinhood want to be a meme stock?

A couple of days earlier, Cramer had recommended investors buy shares in Robinhood. His argument was that the trading app could branch into other forms of finance in the future, benefiting from a young customer base that it could cross-sell to.

In a way, this is the paradox facing traders. Robinhood might go on to become a trusted finance app, but the volatility surrounding meme stocks makes it hard to make a cold investment decision.

Ultimately, it’s unlikely that Robinhood even wants to be a meme stock. Among the disadvantages of your being stock ‘memeified’ is turning off institutional investment as the share price becomes dislodged from the underlying fundamentals.

Robinhood’s stock could also become unstuck by regulatory problems. At the end of June, the Financial Industry Regulatory Authority lumped it with a $70m fine – the highest ever fine against a broker – and the regulator has investigated Robinhood at least seven times. The FINRA and SEC have fined the broker $135m in total. Robinhood itself has spent millions filling out its legal and compliance teams with former regulatory officials.

Where next?

In Robinhood’s investment prospectus that trailed its IPO, the broker revealed revenue jumped from $278m in 2019 to $959m in 2020. That white-hot growth continued into the first quarter with $522m in sales, an explosive 309% increase year on year.

On 18 August, Robinhood will post second-quarter results. A must-watch event for anyone interested in the rise of retail trading and how Robinhood’s stock reacts after its first earnings update as a publicly-traded company.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

Read More