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Why Robinhood Stock Rocketed Higher on Wednesday

By John Ballard – Aug 4, 2021 at 11:22AM

Key Points

  • News broke late Tuesday that famed fund manager Cathie Wood had bought shares.
  • The free stock trading app has been growing like crazy during the pandemic.
  • Robinhood has a bright future, but this stock will likely be extremely volatile in the near term.

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One all-star investor has been buying shares of this hot IPO stock in recent days.

What happened

Shares of Robinhood Markets (HOOD -0.11%) have been on a tear since its initial public offering (IPO) offering on July 29, and the recent interest of ARK CEO Cathie Wood has sent the stock surging this week. 

It became known before the market opened on Wednesday that Cathie Wood bought more shares of the stock recently for the ARK Fintech Innovation ETF (ARKF -0.65%). The stock was up 35% at 10:17 a.m. EDT on Wednesday, but was up much more than immediately after the market opened for trading, when it traded as high as $84.

The stock has nearly doubled since its IPO.

HOOD Chart

HOOD data by YCharts

So what

Cathie Wood's ARK ETF has delivered annualized returns of 34% since its inception in 2014, so anything that shows up among her holdings is going to cause a stir in the markets.

Robinhood certainly has a bright future. It has experienced incredible growth since its founding in 2013. Net cumulative accounts reached 18 million in the first quarter, up from 12.5 million at the end of 2020, which was up from 5.1 million at the end of 2019.

Most importantly, Robinhood is already showing good progress in monetizing its users, even though it doesn't charge any commissions for trades. The free trades are attracting millions of users, but Robinhood offers additional services, such as Robinhood Gold, which provides additional features and research reports for $5 per month. Average revenue per user has more than tripled since 2017, increasing from $37 to $137 through Q1 2021. 

A person using a mobile phone.

Image source: Getty Images.

Now what

Investors shouldn't buy Robinhood stock expecting to get rich quick. A 77% move in a few days is massive for a stock with an already large market cap of $52 billion. That's a price-to-sales ratio of about 52, based on Robinhood's 2020 revenue of $959 million. 

However, Robinhood posted a small profit last year of $7 million, which was a significant improvement over the loss of $107 million in 2019. As existing users continue to grow their relationship with the popular investing app, Robinhood expects these users to adopt additional services that should keep revenue and profits growing over time. 

Robinhood pioneered free stock trading on mobile devices, and it should continue to show high growth rates as it democratizes investing for people who don't have much money to start with. But at these valuation levels, investors should buy shares only if they believe in Robinhood's long-term future.

After nearly doubling in value in a mere week, the shares are bound to be volatile in the near term. Consider that just during Wednesday morning's trading, this IPO stock surged to $84 before falling back to under $60 in less than an hour. 

John Ballard has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Robinhood Markets, Inc. Stock Quote
Robinhood Markets, Inc.
HOOD
$9.18 (-0.11%) $0.01
ARK ETF Trust - ARK Fintech Innovation ETF Stock Quote
ARK ETF Trust - ARK Fintech Innovation ETF
ARKF
$15.19 (-0.65%) $0.10

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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