When Robinhood (NASDAQ:HOOD) suddenly restricted GameStop (NYSE:GME) trading on January 28, investors were rightfully livid. It seemed as though the trading app had single-handedly halted GME’s rise, snapping the intense momentum Reddit traders had worked to build. As a result, thousands of trades ended up losing money.
What goes around comes around. So it’s only fitting that Robinhood’s IPO — one of the year’s most hotly anticipated listings — fell flat. Despite promising to upend Wall Street and bring cheap investing to the masses, HOOD has started to look more like a mobile version of the firms CEO Vlad Tenev set out to usurp.
Essentially, it’s worsened the fight against the haves and have-nots — an observation that Eric Fry and Louis Navellier talk about extensively for investing on the right side of that chasm. (If you don’t have the time for the video, the transcript is a worthwhile read).
Meanwhile, those still stuck on the other side have moved onto other pursuits. From online gambling to streaming services, these firms have capitalized on retail investor disillusionment with Robinhood’s mission. And while I’m bullish on HOOD for the long run because of its growing cryptocurrency platform, the firm’s recent stumble opens the door for other Moonshot bets.
As Robinhood Stumbles, Other Attention Economy Moonshots Are Winning
Perhaps Robinhood’s fall from grace was predictable. FINRA (Financial Industry Regulatory Authority) regulations have long restricted trading by non-accredited (read: not rich) investors. People with less than $25,000 in their trading accounts, for instance, are banned from day trading — defined as trading the same stock more than four times within five days.
But many of Robinhood’s problems were also self-inflicted. The company’s GameStop (NYSE:GME) trading blackout — which also included halts on AMC (NYSE:AMC), BlackBerry (NYSE:BB) and Nokia (NYSE:NOK) — was spurred by the firm running out of money to use as collateral with regulators. S-1 filings for HOOD stock would eventually reveal the brokerage had a thoroughly deficient capital cushion.
Robinhood’s lack of customer support — a point of pride for many online-only firms — also became a failing. Earlier this month, the firm settled a wrongful death lawsuit with the family of Alex Kearns. The 20-year-old trader had died by suicide because he mistakenly believed he owed $730,165 to the trading app. It’s reinforced the idea that Robinhood management has stacked the cards against their customers.
The Attention Economy Moves On
Robinhood has since lost its place as the number 1 most downloaded app in the U.S., per research firm SensorTower (It’s now around number 220). In its place, video apps like TikTok and influencer game Streamer Life! have filled the void. And social media app Snapchat’s (NYSE:SNAP) blowout Q2 results sent the stock soaring 20%.
It’s not that investors are “bored” of investing. According to a survey by Schwab, more than a third of Americans plan on increasing their 401(k) contributions. On the contrary, younger investors seem tired of losing money in a game they feel is rigged against them.
“Will enjoy watching [HOOD] burn down for all the mess ups when we couldn’t trade on certain days and make money,” one angry user vented on StockTwits, a popular stock messaging app. “A lot of people have been burned by this company.”
Competitors have since gained at Robinhood’s expense. In May, DraftKings (NASDAQ:DKNG) announced stellar Q1 revenues that beat Street estimates by a whopping 32%, driven in part by a return to mobile sports betting. Rival FanDuel posted similarly cheery results.
Americans have also started moving back into the real world. Delta Airlines (NYSE:DAL) now expects to break even in Q2 as travel rebounds to 85% of pre-pandemic levels.
How to Profit from Robinhood’s Slump
The success of megacap Robinhood competitors opens the door for other Moonshot wins — small-cap companies riding the coattails of industry-wide growth.
So although Robinhood’s stock might have good long-term potential, tactical traders should consider these three stocks to ride out HOOD’s short-term slump.
3 Attention Economy Stocks to Buy for Revenge on Robinhood: GAN Limited (GAN)
DraftKings and FanDuel certainly pleased investors with their Q1 numbers. But what about investors looking for 20x gains? You would need to look at far smaller companies to realize such big profits.
Enter GAN Limited (NASDAQ:GAN), a $680 million market cap B2B business that runs the technology behind online sports. It’s a company to watch for two key reasons.
First, this company has quietly become one of the largest online gaming platforms in America. Gross operator revenue jumped 73% to $545 million in 2020.
Second, GAN operates a revenue-share business. So when its customers make more money off sports betting, so does GAN.
There are some risks. 42% of GAN’s revenues currently come from FanDuel, a reflection of industry concentration. And challenges in execution remain — the company remains an unprofitable startup in a rapidly-growing industry.
But analysts agree: online betting is fast approaching a tipping point. They expect GAN’s revenues to rise by nearly 20% and its EBITDA (earnings before interest, taxes, depreciation and amortization) profits to quadruple to almost $40 million by 2023. With more legalized sports betting on the way, it’s hard to ignore this regulatory play.
Regular Moonshot readers will know I’m very bullish on an eventual return to travel. Despite the unspeakable toll that Covid-19 has created, people won’t stay holed up in their homes forever.
But the lucrative winner-take-all travel business is already full of large firms that will find it almost impossible to grow another 10x. Priceline parent Booking Holdings (NASDAQ:BKNG), for instance, would have to reach a value near $1 trillion to notch those kind of gains.
That’s why I recommended buying American Airlines (NASDAQ:AAL) LEAPS (long-term equity anticipation securities) instead two weeks ago. Those options — already up 25% since I wrote about them — are an excellent way to make Moonshot bets in an industry with limited growth.
With Robinhood’s IPO fizzle, readers might also consider Sabre (NASDAQ:SABR), a small-cap firm that controls a whopping 40% of worldwide airline bookings. Investors should consider the $17 Jan 2023 calls, which they can buy at $1.38 apiece today.
Sabre’s shares are abnormally cheap.
The $4 billion company was hit hard by the pandemic. Yet even now, its $12 share price sits far below its pre-pandemic $25 average.
And that’s precisely why I like the stock. Sabre, along with competitors Amadeus and Travelport, has an unshakable oligopoly on airline bookings. And as travelers eventually emerge with pent-up vacation days and a severe case of wanderlust, Sabre will certainly benefit.
Who says AMC stockholders have more fun? As Americans return to movie theaters, one thing is clear: people will increasingly go to theaters primarily for blockbuster films. Imax (NYSE:IMAX) proved that point by generating $7 million from Marvel’s Black Widow on opening weekend alone.
And that makes IMAX an obvious Moonshot to consider.
- Business Model. The company has moved away from the cash-draining business of building and running movie theaters. Instead, IMAX now looks more like a high-margin technology licensing firm — remastering blockbuster films and selling/leasing proprietary equipment to screen the large-format films.
- Valuation. IMAX is cheap compared to AMC. At a $1 billion enterprise value, the firm is 4% the size of the meme stock. Its 4.2x forward price-to-sales ratio also puts it at around half the valuation of other licensing companies like Dolby Laboratories (NYSE:DLB).
- Momentum. Finally, there’s the meme stock angle. Retail investors tend to focus on similar-sounding themes — GameStop’s rise triggered short squeezes in a dozen other mall-based retailers. And IMAX’s adjacency with AMC Entertainment could create a buying frenzy.
Closing Thoughts: Seriously. The Market is Rigged Against Retail Traders.
Last week, I talked with a reader who had lost in the GameStop frenzy.
He was convinced the market was rigged against him.
And the upsetting truth? He was right.
Though Robinhood was initially created to “democratize finance for all,” it’s also brought along many of Wall Street’s worst elements.
Consider “best execution,” which refers to getting the best possible price for a stock-buying client (i.e., if Apple (NASDAQ:AAPL) is selling on the NASDAQ for $150, your brokerage should never sell you AAPL for higher). It’s a legally mandated practice in countries from Canada to the U.K. But the U.S. has no such rules; Robinhood’s “zero-cost trading” essentially makes money by channeling client orders to higher-cost settlements.
Or what about lending out your shares? Unknown to most Robinhood investors, the platform allows short sellers to borrow user stock by default. (HOOD also keeps the interest for themselves).
No wonder investors are angry.
But rather than getting mad, why not get even and put your money in companies that take care of their customers? In the world of Moonshots, there’s always plenty of potential to go around.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.