Robinhood stock (HOOD)
In a note titled “Do Not YOLO This Stock,” the firm initiated coverage of Robinhood on Thursday with a peer perform rating. YOLO is an abbreviation for “you only live once.”
′′[W]e can hear your collective sighs and see your eye-rolls,” said analyst Steven Chubak. “We cannot recommend investing in HOOD on either the long or short side in good faith.”
The stock trading app had a lackluster public debut last week, but its shares have recently risen as a result of retail traders and ARK Invest’s Cathie Wood’s enthusiasm.
Robinhood stock soared in wild trading Wednesday, closing 50.4 percent higher on the day and more than 100 percent higher for the week.
However, Wolfe Research believes that the price of Robinhood will not continue to rise. The firm set a price target of $45 on the stock, which is 36% lower than Robinhood’s Wednesday closing price of $70.39. Wolfe calculated the price target using both a traditional broker and a fintech valuation multiple.
Robinhood has warned of a slowdown in retail trading activity and expects new account growth to slow from earlier this year’s highs. Furthermore, increased regulatory scrutiny of Robinhood’s primary business model, payment for order flow, poses a risk to long-term growth.
With the company’s expansion initiatives still in the early stages, Wolfe Research is skeptical of the company’s future opportunities to take more market share.
′′[T]he company is IPO’ing at a time when everything is at its peak, and growth prospects from here may be challenged,” Chubak said.
Although Wolfe Research believes Robinhood shares will fall, even if investors agree with the firm’s assessment, the firm does not recommend shorting the stock.
Short selling is when an investor predicts that the value of a stock will fall. As a result, the investor borrows shares and then sells them at market value. If the stock price continues to fall, the short seller can repurchase the shares at a lower cost and profit. If, on the other hand, the stock price rises, the investor stands to lose a lot of money.
Robinhood has become a part of the meme stock craze that it helped to pioneer. Mentions of the stock have increased dramatically in online forums such as Reddit’s WallStreetBets, where retail traders organize speculative activity.
According to Wolfe Research, investors looking to short Robinhood may face a similar meme stock risk.
According to the “Wolfe QES” screen, HOOD is at the top of the list of stocks with the highest Retail Value.
“Involvement could lead to increased volatility in the near term,” Chubak said.
The firm also stated that the market may place a high valuation on Robinhood in comparison to other high-growth fintech and payments companies. Furthermore, the research firm stated that there are only a limited number of shares outstanding for investors to trade.
“I don’t see a short squeeze as the cause of this move up,” Ihor Dusaniwsky, a short seller at S3 Partners, told me.
Why is it difficult to shorten Robinhood?
According to Dusaniwsky, the number of shares lent out for shorting on Robinhood is still small. “You have nearly 200 million shares trading in the last two days, and about 10 million shares have been borrowed to short,” he explained. “Even if a significant portion of those 10 million shares were covered, it is still only 10 million out of 200 million traded, so the effect on the price would be minimal.”
One reason there hasn’t been an explosion of short selling is that the shares are difficult to borrow. (To short a stock, an investor must first borrow the shares and sell them in the hopes of repurchasing them at a lower price and profiting from the difference.)
Stocks with a high level of retail interest (dubbed “meme stocks”), according to Dusaniwsky, are difficult to lend.
Many retail account holdings are held in non-margin accounts. According to Dusaniwsky, a broker can only accept stock as collateral in margin accounts. If they want to take stock from a non-margin account, they must contact the account holder and request that their shares be borrowed in exchange for a fee.
Many retail holders are skeptical of the offer: “Most retail brokers don’t want to help the shorts,” Dusaniwsky explained.
Another issue for short sellers is that Robinhood is not included in many indexes. It is not included in the S&P 500 or the Nasdaq 100, for example.
“Those mutual fund and ETF providers are the major lenders of stocks to short,” he explained. “Because this stock will not be held in accounts that actively lend, the initial supply will be limited. If there is more demand, lenders and borrowers will approach financial institutions and request loans.”
Apparently, there is a market for it. Robinhood’s annual borrowing costs, according to Dusaniwsky, range from 40% to 90%
Is that a lot of money? It’s a lot more than that. It’s at a stratospheric altitude.
According to Dusaniwsky, the average fee for borrowing stock is 0.56 percent.
“That tells me there is a lot of demand and very little supply,” he said.
There aren’t many stocks that are even close to what it costs to borrow money from Robinhood right now. Hertz, with borrowing costs of 73 percent, is one of the few companies with borrowing costs above 50 percent, according to Dusaniwsky.
Nonetheless, the range of borrowing costs is very wide, ranging from 40% to 90%. Why is it so broad? “Every broker charges whatever they can get away with,” he explained. “I believe that will narrow” as the stock matures, but it may take some time.
According to Dusaniwsky, the high borrowing cost is a major impediment for short sellers.
“If you’re paying a minimum of 40% in borrowing costs, you have to assume you’ll make more than that over the life of the loan. Even if you hold for three months, the borrowing costs are still 10%, ” he explained.
“So, if you think you’re going to make 20% in three months, you’re still only making 10% net of borrowing costs,” he added. ” You have to ask yourself, “Is the risk worth it?” Can I achieve the same result with a different trade?”
Momentum traders are flocking in.
So, what’s the deal with Robinhood? Cathie Wood of ARK Invest may have made a new investment, but “the most likely explanation is long buying,” he said. “Retail and momentum investors are driving up the price. I don’t see value investors coming in; instead, I see retail and momentum traders riding side by side.”
The one feeds off the other, especially momentum traders: “They’re going in and out, intraday, buying and selling,” he explained.
Is Robinhood a meme stock?
According to Erickson, the delay in wild trading activity in Robinhood’s stock provides more evidence that buying pressure is likely coming from retail traders. He claimed that if institutions wanted to invest in HOOD, they would have done so last week, following Robinhood’s disappointing debut, in which it fell 8 percent after pricing at the low end of its range.
“I don’t believe it’s institutional investors who passed last week and are now interested,” Erickson added. He also speculated that some hedge funds may have jumped in to take advantage of the volatility.
Retail investors who didn’t touch the stock last week, according to Erickson, likely didn’t want to “catch a falling knife” after the underwhelming debut.
Robinhood is widely regarded as the entry point for young, inexperienced investors interested in trading in speculative names such as GameStop and AMC Entertainment. Robinhood is now the focus of its own meme crowd.
Robinhood allocated a historically high percentage of its IPO share to retail customers, approximately 25%.
“I expect Robinhood to be a short-term roller-coaster ride because the business itself is volatile due to a heavy reliance on trading, which spikes and slows just like the Covid virus, which has contributed to its growth over the past year,” said Greg Martin of Rainmaker Securities. “In addition, the company is closely watched and traded by the very investors it serves, who tend to be more short-term investors.”
Martin added that the market will continue to struggle to find the right valuation for this company, which is a cross between a high-growth software company and an e-brokerage business.
Currently, Robinhood trades at around 11 times earnings, while Charles Schwab, which offers a more diverse range of products, trades at seven times earnings.
Since the IPO, ARK Invest has purchased nearly 3.2 million shares of Robinhood, a significant vote of confidence from popular investor Cathie Wood.
There will be no squeezing here.
During the pandemic, Robinhood attracted an unprecedented number of new, younger traders to the stock market. That surge has continued into 2021, as evidenced by frantic trading in meme stocks in January.
When Robinhood limited trading of certain securities during the GameStop trading mania amid increased capital requirements from clearinghouses, it appears to have turned off some customers.
Concerning a short squeeze in Robinhood, S3 Partners said that investors have not had enough time to accumulate a large short position in HOOD.
This means that long-term investors are the primary drivers of Robinhood’s stock price volatility.
“With over 170 million shares traded yesterday and so far today, it is clear that any short squeeze of the outstanding shares shorted would have a negligible effect on HOOD’s stock price relative to the amount of long side buying and selling,” said Ihor Dusaniwsky, S3′s head of predictive analytics.