Robinhood on a smartphone
Source: Getty

Redditors' Wrath Could Mean More Downside for Robinhood (HOOD) Stock

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Jul. 30 2021, Published 9:28 a.m. ET

One of the most anticipated IPOs of 2021, Robinhood has finally been listed. The stock started trading on July 29. However, the price action in the stock wasn’t as enthusiastic. The company priced its IPO at $38, which is the lower end of its marketed range. On the first day of trading, HOOD stock closed lower by 8.4 percent at $34.82. This huge decline on the first day has many investors wondering whether Robinhood (HOOD) stock will rise or fall more.

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Robinhood was valued at nearly $32 billion in the IPO. The company sold 52.4 million shares and raised almost $2 billion from the offering.

Why Reddit traders hate Robinhood stock

One of the reasons for the drop in HOOD stock on the first day of its trading is thought to be the resentfulness of Reddit traders with the company. In January 2021, when the meme stock craze was at its peak and Redditors were buying stocks like GameStop and AMC like crazy, Robinhood temporarily halted trading in some of these stocks, which angered the Reddit community.

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robinhood price first day
Source: Robinhood

On WallStreetBets subreddit, one user posted a thread dedicated to the Robinhood IPO. The post has gathered comments like “Jan28#neverforget.” The users also aren't happy about the outages on the site. Several Reddit users suggested shorting Robinhood stock.

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Why HOOD stock is falling

One of the other major reasons for the drop in Robinhood's price on debut could be its strategy of offering a big chunk of its IPO to its own users. Many IPOs gain a first-day pop in prices due to retail investor demand. By keeping a large chunk for retail investors and traders already, Robinhood probably ended up curtailing the early demand from these quarters.

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Other concerns with the HOOD IPO were its rich valuation, concerns about a market top amid the Delta variant and other risks, the company warning that its trading volumes could decline in the second quarter of 2021, and the ongoing SEC scrutiny over its order flow business.

Will Robinhood stock rise or fall?

Along with a high percentage of IPO offerings reserved for Robinhood users, the company also allowed its employees to sell some of their shares immediately, which is atypical for traditional IPOs, according to The Wall Street Journal. All of these factors led to choppy first-day price action for the company. However, these factors are short-term and shouldn't impact the stock in the medium to long term. After the initial dip and as the choppiness settles, the stock could rise some.

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robinhood stock outlook
Source: Robinhood Facebook

Will Robinhood stock go back up?

The factors that will impact the stock in the medium to long term will be the sustainability of its revenue growth amid the concerns that the market might be topping. This could lead to a slow rate of new user sign-ups for the company. A large part of Robinhood's revenue growth in the first quarter was attributable to cryptos and outsized trading for Dogecoin. Along with other cryptos, Dogecoin has lost momentum since the first quarter. Therefore, a slowing rate of growth in revenues might be round the corner for the company.

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In addition, the regulatory scrutiny around Robinhood's order flow payments could be a big risk for the company going forward. The stock could also attract the potential wrath of Reddit traders. If the users short in unison, it could put more downward pressure on the stock.

After Robinhood's valuation factors in most of the above-mentioned risks or when there's more clarity on some of these issues, like the SEC inquiry, the stock might be on its way up again. There are numerous positives in the company, including a high growth rate in revenues, users, and assets under custody.

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