Robinhood is a trading platform trying to revolutionize how we invest in stocks. If you're really new to investing, you may be surprised to hear that investors used to pay hefty trading fees on every stock purchase. Nowadays, most brokerages offer commission-free trades, but it was Robinhood that sparked the industry change. It was an early free-trading pioneer, and it forced other brokers to adapt.
Another attractive perk with Robinhood is the free share of stock that users get just for signing up with the service. While it's possible to get a share of a company worth over $100, most users receive a stock worth less than $10. GoPro (GPRO -0.59%) is a common freebie. This might explain why it is among the 10 most commonly held stocks on Robinhood. Users receive it and choose to hold on to it.
But if you're a Robinhood user who got GoPro for free, there's something you should understand. It's tempting to just hold it and "play with the house's money." But that's a gambler's mentality.
It's not the house's money. That's your money. GoPro stock might not be worth much in dollars, but the free stock provides a great opportunity for beginning investors to build good habits to last a lifetime. So here's what Robinhood users should do with their free share of GoPro.
Evaluate GoPro's business
If you're holding GoPro stock, you're obviously hoping it goes up. But what causes a stock to rise in the long term? Stocks are tethered to real-life businesses. GoPro shares will likely bounce both higher and lower in the short to medium term. But if the company can consistently grow sales, profits, or a combination of both, then the stock will likely go up in the long term.
There's reason for optimism. GoPro says it is currently experiencing strong demand. In a press release, the company said demand on its website is up over 500% year over year since late April. The company is also releasing more accessories these days, like the new Zeus Mini light, which can help grow revenue. Furthermore, GoPro Plus subscriptions continue rising, providing a recurring revenue stream.
But also consider that GoPro, like other companies, tends to highlight only the best-looking metrics for investors. For example, the company said demand is up 500%. But this is only for its online direct-to-consumer business and it's not enough to offset an overall sequential drop in sales. It expects to report unit sell-through (end-sales of cameras to consumers) of 600,000 to 650,000 in the current quarter -- less than the previous quarter. It's reminiscent of the second quarter of 2019, when it reported 90% growth in unit sell-through for cameras over $300. But cameras shipped only increased by 1%. And revenue was only up 3%.
In other words, investors need to dig deeper to understand whether GoPro's financial results are actually improving. Bullet points in press releases always look impressive.
The bottom line: If you're holding GoPro stock, you need to have a conviction that it will offer good returns. If you don't, you should move on.
Find a better stock for the long haul
If you decide to move on from your free GoPro stock, that's where the beauty of Robinhood's platform really lies. Since there are no commissions, you can sell GoPro without it costing you anything (other than capital gains taxes). And since Robinhood offers fractional shares, you can literally buy a piece of any public company out there even if you don't have enough money to buy a full share.
For example, Chipotle Mexican Grill (CMG -1.64%) currently trades near $1,200 per share. But you can still use the $5 from selling GoPro to buy a fractional share of Chipotle. At current prices, it would be less than 1% of a share. This might not feel as cool as owning a whole share, but it will provide you the exact same percentage return as a whole share. If the stock doubles, your investment doubles no matter how small your personal stake.
If I had to choose which stock, GoPro or Chipotle, will double over the next five years, I'd choose Chipotle. The company generates loads of cash from operations, and it's currently reinvesting this money back into the business. It's opening new company-owned restaurants, and remodeling old locations to enable higher sales volume. And that higher volume, if achieved, will lead to higher profits and more cash on hand to reinvest in the business. It's why I think the stock can provide good returns.
The principles in this article apply to whatever stock you get free on Robinhood, even if you were lucky enough to score free stock in high-dollar companies like Facebook or Apple. If you're holding it, you need to know why you think the business will perform well. If you don't have that conviction, it's time to search for a better alternative.