Robinhood IPO Shows Near-Term Market Top, Shorting HOOD Stock Is Risky

Mohit Oberoi, CFA - Author

Jul. 29 2021, Published 8:40 a.m. ET

Robinhood has priced the IPO and will start trading on July 29. The popular trading app will trade under the ticker symbol “HOOD.” Some people are speculating whether the Robinhood IPO signals a market top, just like the Coinbase direct listing almost coincided with a peak in cryptocurrency markets. Should you short HOOD stock?

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Robinhood has priced the IPO at $38, which is at the lower end of the original range. The company joins a flurry of others who have either priced the IPO at the lower end or even lower. In 2020, most companies priced the IPO above the range. Amid the boom, Roblox and Affirm delayed their IPOs until 2021 to rework the pricing.

Robinhood stock valuation

Robinhood would be valued at $32 billion in the IPO. The company sold 52.4 million shares and raised almost $2 billion from the offering. Along with the absolute numbers, we also need to look at comparative numbers. According to Robinhood, it had 22.5 million funded accounts in the second quarter of 2021, which is significantly above the 18 million that it had in the sequential quarter.

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The assets under custody also swelled from $81 billion to $100 billion over the period. The company posted revenues of $959 million in 2020, which results in a 2020 price-to-sales multiple of just above 33x. Meanwhile, Robinhood’s revenues in the first half of 2021 have already surpassed what it posted in all of 2020.

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Is HOOD stock overvalued?

HOOD has been running at a quarterly revenue run rate in excess of $500 million for the last few quarters. At the midpoint of its guidance, Robinhood posted revenues of $1.08 billion in the first half of 2021. If it can post revenues of $2.5 billion in 2021, we’ll have a 2021 price-to-sales multiple of 12.8x.

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Based on the $32 billion valuation and 22.5 million, we get a valuation per funded account of $1,422, which is below E-Trade and TD Ameritrade, according to the analysis from MKM Partners. HOOD stock should trade at a discount since it's largely catering to retail traders and the dollar amount per account is lower than many other brokers.

Robinhood is still seen as a “fun trading app,” which could hamper the company’s efforts to diversify into more serious businesses like IRS. Also, Robinhood’s business model mainly revolves around earnings from order flow, a process that’s being scrutinized by the SEC.

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Does the Robinhood IPO signal a market top?

Coinbase's direct listing was preceded by euphoria in the cryptocurrency market. However, the cryptocurrency market has slumped. We can't derive a causality between the Coinbase listing and the cryptocurrency crash. The steep rise in cryptocurrencies before the Coinbase listing did make them susceptible to a crash.

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Looking at the current macro environment, the rising Delta variant cases could jeopardize the economic recovery. Also, China’s crackdown on its tech giants is adding to the risks. A fall in trading volumes could have a negative impact on Robinhood stock. While Robinhood’s IPO doesn't necessarily signal a market top, it looks like a near-term top after the sharp rise in stocks so far in 2021.

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Should you short HOOD stock?

Meanwhile, shorting HOOD stock could be a risky exercise. The company offered a big chunk of shares in the IPO to retail traders. Acting as a cohort, retail traders helped trigger a short squeeze in many names including GameStop and AMC. Now, AMC is mainly owned by retail traders since most institutional investors cashed out.

Robinhood stock might assume the status of a meme stock because many Reddit traders use the app. Betting against Reddit traders hasn’t been a very profitable strategy in 2021.


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