Few investors yearn for volatility. But for millennial and novice investors, stock market volatility has acted as the perfect lure.
Robinhood, the online investing app that's been particularly adept at attracting young investors, gained approximately 3 million new users last year amid the coronavirus chaos. As you can probably imagine, many of these millennial/novice investors aren't putting their money to work over the long-term. Rather, they're looking for opportunities to get rich quick -- and it shows.
Although Robinhood no longer shares specific figures regarding how many members are holding a stock, it still regularly updates its leaderboard, which ranks the 100 most-held companies on the platform. This leaderboard is filled with momentum stocks, penny stocks, and otherwise awful companies caught up in the WallStreetBets Reddit-based rally.
In particular, we've seen four highly questionable stocks jump into Robinhood's top-10 holdings within the past week (as of Feb. 2).
Say hello to Robinhood's new darlings
Apple and Tesla have more or less been the two most-held stocks on Robinhood for months, but there's been a big shuffle behind these big names.
Let's begin with the new No. 3 stock: AMC Entertainment Holdings (AMC 6.82%). That's right: The same AMC Entertainment that appeared on the brink of filing for bankruptcy just a few weeks ago is now the third most-held stock on the platform.
The Reddit rally swept up the heavily short-sold movie theater chain, pushing its share price from around $3 to as high as $20. Even though AMC was able to raise $917 million through various stock offerings and debt issuances and has avoided bankruptcy, it's not clear if the company can survive over the long run. The pandemic has completely upended the movie theater operating model. It's possible that people will prefer consuming new content from the comfort of their couch moving forward.
Nipping at AMC's heels in the No. 4 spot is Nokia (NOK -1.54%). Previously an afterthought for young investors, the former producer of cellphones turned wireless technology products manufacturer now has their full attention. Unlike AMC, which was heavily short-sold, Nokia found itself part of the recent Reddit rally solely because of its low share price and ample liquidity. While Nokia is at least profitable -- which is more than we can say for AMC -- the company's top-line growth has stalled.
Another surprise in Robinhood's top 10 is multichannel video game and accessories retailer GameStop (GME 2.85%), which comes in at No. 8. GameStop was at the heart of the short squeeze-fueled Reddit rally over the past two weeks, with its shares catapulting by more than 1,600% in January.
The problem is that GameStop simply isn't a very good company. It's busy closing its brick-and-mortar locations to reduce costs, and it was very late in transitioning to digital gaming downloads. Having produced losses for three consecutive years, GameStop shouldn't be anywhere near Robinhood's leaderboard.
Lastly, Canadian marijuana stock Sundial Growers (SNDL 7.77%) has steadily crept up the leaderboard and now finds itself as the 10th most-held stock on the platform. Like Nokia, Sundial isn't heavily short-sold. Rather, it's been trading at penny stock levels for about six months, and young investors love low-priced stocks.
Like each of the other new stocks in Robinhood's top 10, it probably shouldn't be in investors' portfolios. Sundial has been drowning its shareholders in equity offerings and debt-to-equity exchanges. It's also transitioning from the wholesale side of the cannabis business to retail, which has led to some less-than-enticing year-over-year operating comparisons.
These brand-name stocks were booted out of the top 10 by the Reddit rally
The mind-boggling rise of AMC, Nokia, GameStop, and Sundial becomes even more astounding when you look at the stocks they replaced in the platform's top 10.
For example, e-commerce giant Amazon (AMZN 1.67%) now sits at No. 11 on the leaderboard. Amazon, which controls between 39% and 44% of all U.S. e-commerce, just reported $125.6 billion in fourth-quarter sales, with $66.1 billion in full-year operating cash flow in 2020 (a 72% increase). What's more, cloud infrastructure segment Amazon Web Services (AWS) delivered Q4 sales growth of 28% and has an annual run rate of $51 billion in revenue. Because cloud margins are so much higher than retail revenue, AWS was responsible for $13.5 billion of Amazon's $22.9 billion in operating income last year despite only accounting for 11.75% of total sales.
Yet it's now behind AMC, GameStop, Nokia, and Sundial on the Robinhood platform.
Reddit rally stocks also kicked Walt Disney (DIS -0.29%) off the top 10 list. It now sits one spot (No. 12) behind Amazon. Sure, the pandemic hampered Disney's park revenue, but the company has insanely valuable intellectual property and the incredible early success of the Disney+ streaming service. Disney+ had nearly 87 million subscribers in December 2020, and looks on track to sign up between 230 million and 260 million global subscribers by late 2024. That's about three times higher than the company originally anticipated.
Robinhood's leaderboard shows us the dangers of the get-rich-quick mentality. If investors continue to bypass great businesses in pursuit of momentum companies with no substance, they're going to be sorely disappointed by the end result.