Robinhood Stock Poised to Surprise Bears
(Tech stock columnist Jon D. Markman publishes Strategic Advantage, a lively guide to investing in the digital transformation of business and society. Click here for a trial.)
Robinhood (HOOD) has been derided by traditionalists, regulators and even some users yet its shares have been a big hit with investors. Buckle up, there is more to come.
Fidelity reported on Tuesday that Robinhood became the top traded stock on its platform. The ticker is also among the most mentioned on WallStreetBets, the popular Reddit stock trading stream.
Like GameStop (GME), Robinhood is becoming a meme.
That means much higher prices are coming.
So-called meme stocks make no sense to older investors. Based on financial ratios and metrics, their soaring share prices can’t be justified by the outlook for the underlying business. That is all true, and irrelevant.
Meme stocks are about gaming the system, full stop.
Gamestop is a struggling, brick and mortar video game retailer. Its business model is a casualty of the online gaming era. Despite this, shares rallied from $12.15 in December 2020 to a high of $483 one month later. All the way up hedge fund managers bet against the stock with short sales. Media pundits shook their heads in disbelief.
The professionals misunderstood what was happening. They couldn’t believe anyone would be foolish enough to pay $480 per share for a company that lost $1.6 billion the previous 12 quarters.
The Gamestop rally was about organizing an epic short squeeze to force professional doubters to buy back short positions for huge losses.
Bloomberg reported in January that Citron Research and Melvin Capital, two of the most prolific GameStop short sellers lost billions on the wrong side of the meme stock.
Robinhood is the next perfect meme stock, and it is primed for a huge rally.
The business is hated by financial services traditionalists. They feel the smartphone-centric platform gamifies investing by making transactions too easy, and diminishing the value of traditional stock research. Other doubters point to the record $70 million fine imposed by regulators for harming customers. That settlement was the result of users filing lawsuits during the Gamestop rally.
When the IPO debuted last week at $38 shares immediately began to attract short sale interest, according to a report from the New York Post.
Gains on Tuesday pushed the share price to $46.80, up 24.2%.
The Fidelity order flow news should be a red flag for professional short-sellers. The keen interest on the WallStreetBets message boards means the game is on. Small investors are organizing a short squeeze.
I’m not suggesting Robinhood will replicate the 40x returns Gamestop shareholders enjoyed in January 2021 yet stranger things have happened.
Don’t be surprised if shares continue to shoot higher.
