Time and time again, Wall Street makes the same mistake. A good idea shows up, and investors jump aboard with abandon and without taking the time to think about the subtleties of the business. The stock rockets higher, and then, when reality starts to set in, the stock crashes. That is why Robinhood (HOOD 2.09%) has been such a dismal investment since its initial public offering (IPO).
Forcing change
The big story with Robinhood was that it makes investing easy with an app-based interface and commission-free trading. Free trading was such a radical notion that the company's success in attracting customers basically forced other discount brokers to match its low costs. Essentially, Robinhood directs customer traffic to market makers that pay it for the privilege of executing the trades. This isn't unique to Robinhood, so there's nothing unusual in the practice. What is different is that Robinhood has been willing to base its business on just this revenue stream on the trading front.
Image source: Getty Images.
Effectively the broker was attempting to keep costs ultra-low via an app interface while getting lots of volume by attracting customers with free trades. Wall Street loved the idea, especially as meme stock traders took on the "establishment" during the coronavirus pandemic. That, however, didn't prove sustainable. As the chart below shows, Robinhood's revenue spiked after its IPO in July 2021 but then quickly cooled. As for earnings, well, there's been more red ink than black ink.
Data source: YCharts HOOD Revenue (Quarterly)
The fact that Robinhood's shares have been falling shouldn't be all that surprising given this background. But just how bad has it been?
Ouch! That hurts.
If you had bought Robinhood at the IPO price of $38 per share, your stock would now be worth around $8.50 a share. A $1,000 investment would have turned into roughly $245 in a little over a year. That's a terrible outcome, but not the worst of it.
At first, thanks to the sharp run-up, investors who bought at the IPO would have felt like geniuses. The stock roughly doubled in just a few days as investors clamored to invest in the company that was upending the discount brokerage industry. What if you bought at the peak of the hype?
As the chart above shows, you would now be left with just $121. That's less than half of the value you would have had if you bought at the IPO. Somebody did, in fact, buy shares at the peak. While there's no way to know if that person held the stock all the way through to today, given the stock chart, they inevitably lost a lot of money.
So far, Robinhood has been a great story on Wall Street but not a particularly profitable one or a financially rewarding one for a lot of the early investors.
Boring can be better
Investing can be exciting and fun. It is easy to get caught up in the frenzy during bull markets, but having an investment process is particularly important at those times. And for most investors, process will be way more important than getting in on a hot new stock. That's because process can lead to replicable success, but winning the lottery with a temporarily hot IPO once won't likely teach you anything. And, as the second graph shows, some early winners can end up being losers as time wears on.
