Broker-dealer Robinhood Markets (HOOD) - Get Robinhood Markets, Inc. Class A Report, a newcomer in the stock exchange, has been trading below its IPO price of $38. On the surface, mild bearishness seems incompatible with the Menlo Park-based company’s business momentum – it has benefitted greatly from the wave of new investors that flooded the financial markets since last year.
Wall Street Memes explains the risk of Robinhood being disliked by some of the same clients that the company targets – members of the ape community that have been strong critics of the broker for its business model.
(Read more from Wall Street Memes: Robinhood Stock: Should You Buy Or Avoid It?)
The business model
First, it helps to recap how Robinhood produces the bulk of its revenues. As part of the broker’s “democratize finance for all” mission, it offers commission-free trades to its clients. The company makes up for loss of fees by collecting PFOF (payment-per-order-flow) from the likes of Citadel Securities and Susquehanna.
PFOF is a legal practice in the US that consists of selling customer orders to market makers. More than 80% of Robinhood’s revenue comes from PFOF. See below:
This model has been severely criticized by many in the ape communities. They generally claim that, through PFOF, (1) the transparency of trades is compromised and (2) market makers have the upper hand over retail investors in order execution.
Rage against HOOD
Robinhood was one of the most commented stocks during its IPO week on WallStreetBets. See chart below. Clearly, apes have been following this stock closely – and the sentiment towards it has often leaned negative.
(Read more from Wall Street Memes: What Is Stopping CLOV Stock From Going To The Moon)
Wall Street Memes’ take
Fundamentally, Robinhood seems to be in decent footing. The company’s financial results and key operating metrics (e.g. growing user base) have been moving in the right direction. Also, HOOD has attracted the attention of rock-star investors like Cathie Wood – which may explain the stock’s single-day 7% gain on August 2.
However, the risks should not be ignored. We think that the main one, in the short term, has to do with the broker’s brand as an “order flow company”, and how several retail investors seem turned off by the company’s business model. In addition to sentiment-driven downside risk, expect HOOD share price to be highly volatile, at least in the first several days or weeks of trading.
Recently, we proposed a Twitter poll asking if Robinhood stock was a buy at $35 apiece. Check the answers below.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)