Robinhood Stock May Not Be All That It Is Cracked up To Be

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One thing is sure about the direction of Robinhood (NASDAQ:HOOD) stock in the coming weeks and months: No one will be able to offer you any concrete advice. 

Robinhood stocks: app logo seen on smartphone on US dollar banknotesSource: mundissima / Shutterstock.com

Investors looking for definitive evidence of its price trajectory have very few useful opinions to follow.

That’s not to say that those opinions aren’t based on sound investing wisdom and experience: They are.

Rather, it’s that in its short existence as a publicly-traded company, HOOD stock has simply proven unpredictable. So, at this point, my guess as to Robinhood’s price trajectory is as good as yours.

It is therefore appropriate to simply summarize some of the points surrounding both the bull and bear theses and leave it to you to decide. 

Let’s start with Wall Street’s thoughts regarding Robinhood as a stock. 

Analysts and Hood Stock

There are currently three analysts covering Robinhood stock on Wall Street. There’s actually a lot of good news to take from their projections.

As an example, the lowest price target among the three is $45. That’s pretty much where it is trading today. It suggests the stock may have bottomed out, and that a worst-case scenario isn’t that bad.

The other two analysts give it a price target of $65 and $151.20, respectively. Again, there’s an easy case here for optimism given those potential returns.

If they are indeed accurate, investors could anticipate returns between 35.42%-215%. Any investor would be happy with those numbers. 

The average of those three analyst target prices comes out to $87.07, an 81.4% return. Again, though, it must be noted that Robinhood only had its IPO 2 weeks ago. 

The Difficulty of Robinhood

We can see that Robinhood is well regarded by Wall Street at this point, but we have to ask why. 

Ostensibly Robinhood is the antithesis to Wall Street trading practices. It has been hailed as a democratizer of trading due to its commission-free trades. Yet, based on those analyst projections above, Wall Street is big on Robinhood. So what gives?

Part of the answer lies in something called payment for order flow. Robinhood doesn’t make money on commissions, but it has to make money somewhere. Robinhood does so through payment for order flow.

Payment for order flow is a somewhat opaque process that has proven controversial. Basically, the payment for the order flow is received by a broker who routes trades for execution. Part of the argument against this method is that brokers have an incentive to make the market for certain trades. 

Conversely, if Robinhood’s platform was totally democratized, then it would be the trades of its participants that would make the market. However, payment for order flow implies that the deals Robinhood users are being exposed to are directed to them, rather than created by their demand. 

Thus, Robinhood may not be what is billed to be at all. Rather, the argument can be made that it is a tool of greater Wall Street powers masquerading under an eponymous facade in Robinhood.

In 2020 it made $687 million from the method: Food for thought. Then, there’s the issue of finances. 

Big Loser

Robinhood’s prospectus contains 341 pages of information regarding the company’s IPO, and some of the most important information therein is simple net income figures. 

Robinhood lost a lot of money in 2019, recording a net loss in excess of $106 million. The company burst into the public investment consciousness in 2020, recording a net income of $7.449 million for the entire year.

Robinhood then posted a $1.444 billion net loss in the first three months of 2021, and its prospectus showed that the company anticipated a Q2 2021 net loss of between $487-$537 million. 

None of that bodes well for the company or its stock. 

Takeaway

The case for Robinhood as an investment is a polarizing one. Wall Street is fairly gung ho regarding its prospects, but investors have to ask themselves what they’re investing in Robinhood in the first place.

If it’s price appreciation alone, I can see their argument. If it’s because Robinhood changed the game, giving the power to the people, I’d recommend they look twice.

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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