Cathie Wood Just Bought Over $1 Million of This Stock -- Should You Follow Her Lead?

In May, Cathie Wood's ARK Investment purchased over 140,00 shares of Robinhood Markets (HOOD 4.44%) in its ARK Fintech Innovation ETF. Considering Wood's penchant for innovative and (seemingly) market-disrupting companies, her interest in Robinhood isn't surprising. ARK's investments are no stranger to roller-coaster rides.

When Robinhood had its initial public offering (IPO) in July 2021, its stock price increased by over 55% within a week. It's now down close to 82% since its August 2021 peak. This year is going better, with the stock up over 19% year to date, but does that mean you should follow Wood's lead? Probably not. Let's see why.

Revenue growth may be misleading

While many companies have suffered under higher interest rates, Robinhood has greatly benefited from them. When customers keep cash in their Robinhood accounts, Robinhood keeps the cash in one of its partner banks. Since interest rates have increased, so have the yields on savings and other deposit accounts.

In the first quarter, Robinhood had $6.3 billion in cash, and its customers more or less held $3 billion in cash on the platform, so these higher interest rates were a big boost to its results. Net-interest revenue increased to $208 million, 25% more than the fourth quarter of 2022 and up 278% year over year. This boosted Robinhood's overall Q1 revenue to $441 million, up from $299 million in Q1 2022 but still less than the $522 million it made in Q1 2021.

Since interest rates are fluid and could be cut by the Federal Reserve at any point, it's important to look past just Robinhood's overall revenue. Robinhood can't sustain itself without sufficient transaction revenue, which hasn't been trending in the right direction.

Data source: Robinhood.

24-hour trading likely won't be enough

Robinhood recently announced it would introduce 24-hour trading -- from 8 p.m. ET on Sunday to 8 p.m. ET on Friday -- for 43 of the most traded stocks and exchange-traded funds (ETFs) on the U.S. stock market. On the surface, allowing more time for trades makes sense if you're trying to make investing more accessible. But regarding its potential impact on Robinhood's trajectory, I'm not convinced it'll have a tangible one.

To compete with larger brokers that offer more services, Robinhood tries to rely on more "innovative" services to grow its customer base. To its credit, Robinhood did usher commission-free trading into the mainstream, but no other offering has seemingly kept investors around.

Robinhood's 11.8 million monthly active users (MAUs) is almost 10 million fewer than it had in 2021 during the pandemic-fueled growth it experienced. It's hard to believe extended trading hours will attract enough new investors to noticeably counter Robinhood's declining transactions.

There's also the elephant in the room of ensuring Robinhood can handle the operational logistics that come with 24-hour trading, especially if it increases volume, as I'm sure the company hopes. I'm not saying it can't by any means, but given its previous outage issues, it doesn't have much room for error in the public eye.

An uphill battle

With declining active users and transaction-based revenue, Robinhood will be fighting an uphill battle for the foreseeable future. It also doesn't help that more traditional brokerages are releasing apps with more sleek and user-friendly interfaces, which initially drove people to Robinhood. 

Robinhood is a growth stock, so it's high-risk, high-reward, but at this point, I don't see much upside and the potential for a lot of downside.