There has been a meme mania in 2021 and from stocks to cryptocurrencies, we’ve had several meme assets. A large number of retail traders who traded in meme names did so on the Robinhood app. Now, the company has gone public and has displayed many features of a meme stock. However, there's something that separates Robinhood stock from other meme stocks.
HOOD stock priced the IPO at $38, which was at the lower end of its range. The company reserved almost a third of the IPO shares for retail investors, which is way higher than other companies. However, it goes with Robinhood's motto and brand image. Despite pricing the IPO at the lower end of the range, the stock closed down on itslisting day.
HOOD stock soared amid buying interest
HOOD stock went on to hit a low of $33.25 and joined the long list of newly listed companies that trade below the IPO price. However, as the stock slumped, many investors saw value in the company. Jim Cramer advised investors to buy the stock. Later, he advised booking profits as HOOD stock soared.
Cathie Wood of ARK Investbought some Robinhood shares after it slumped. She's known to back the companies she invests in and uses the dips to buy more. She also added Coinbase shares after the IPO even as she sold some Tesla. HOOD stock went on to hit a high of $85 which was 155 percent above its lows.
Why HOOD stock is falling
The rally in HOOD stock was driven by speculations including whether the company will enter the BNPL (buy-now-pay-later) market. Recently, Affirm stock soared on speculations that it be an acquisition target after Square announced the acquisition of Afterpay.
Robinhood’s business model itself is now under the scanner. The company gets most of the income from order flow by routing customer orders to others. SEC Chair Gary Gensler isn't too impressed with the mechanism. He sees it as a risk and doubts whether clients get the best execution.
Since Robinhood doesn't charge direct brokerage, it would have to change its business model if the SEC cracks down on the order flow mechanism.
Is Robinhood a meme stock?
CMC Markets defines a meme stock as “the shares of companies that have seen a recent surge in viral activity, which is usually fuelled by online social media platforms such as Reddit and Twitter.”
Most of the meme stocks had short interest and the stocks were out of favor with markets. The term was originally from the Reddit group WallStreetBets, which was instrumental in triggering a short squeeze in many stocks including GameStop and AMC Entertainment.
HOOD stock has displayed several similarities with meme stocks including high volumes, a flurry of activity on social media, as well as the stock rising too fast and too soon. Like other meme stocks, it has also run ahead of its fundamental value.
While HOOD stock is very popular on WallStreetBets, many of the members don’t like the stock. Robinhood blocked trading in meme stocks earlier in 2021 which earned it the ire of Reddit traders. In fact, many of the WallStreetBets members talked of shorting the stock after having triggered epic short squeezes in many stocks.
Simply put, a lot of WallStreetBets members now find themselves on the other side in meme stock mania. So, while HOOD stock isn't a meme stock as far as WallStreetBets members are concerned, it does looks like one from the perspective of markets.
In other meme names, Wall Street analysts watched in disbelief as the stock surged way above its fundamental value. This time, the meme wasn't on analysts but Reddit traders. All said, like other meme names, HOOD stock might meet the same fate and could settle near its fundamental value. The crash has already started and might continue in the near term, in typical meme stock fashion.