Robinhood Stock Is Overpriced, But Don’t Underestimate Its Potential

Robinhood (NASDAQ:HOOD) stock is the latest to get the meme treatment.

A magnifying glass zooms in on the website for Robinhood (HOOD).
Source: dennizn / Shutterstock.com

Investors find names like HOOD stock and squeeze them higher.

Meme stocks have also been called “Reddit stocks” and have a tendency to boast incredible volatility. HOOD stock went public on July 29 and was not met with much fanfare. 

The company went through a traditional IPO, pricing at $38 — the low end of its offering range. That’s where the stock opened, while shares closed at $34.82, down 8.4% in its first day of trading. Not exactly a ringing endorsement. 

However, shares stabilized in the next session, climbed 7.2% on the third day and exploded higher by 24% on the fourth day. The meme treatment was coming. Bulls were clamoring and retail investors were itching to squeeze this name higher just like they had in GameStop (NYSE:GME), AMC Entertainment (NYSE:AMC) and dozens of others so far this year.

 

They finally did it on Aug. 5, the fifth trading day for HOOD stock. Shares ended higher by 50%, but climbed more than 80% at one point in the session. Now what?

Can Hood Stock Get to $100?

Daily chart of HOOD stock
Click to Enlarge
Source: Chart courtesy of TradingView

After that sudden surge, HOOD stock fell 27.5% in the following session. That had the stock down 40% from the highs as the volatility raged on.

Now down in seven of the past 10 sessions, it’s clear Robinhood has been riding a tough trend. It trades today around $46.

 

Shares are below the newly established 10-day moving average and continue to struggle with the VWAP reading. However, the stock is also in a falling wedge pattern.

That’s not to say that HOOD stock can’t go down from here, but generally, bulls are looking for a break out of the wedge, not a break down.

If we get that breakout, it will land shares above the 10-day moving average. In that scenario, $50 and the VWAP measure are the next hurdles to clear. Since breaking below both marks, these two measures have acted as resistance. 

At this point, readers are likely wondering how the $100 mark comes into play. Above $50 and the VWAP could put the 50% and 61.8% retracements in play. The latter sits near $69 and above that, the high at $85 is within reach. 

To clear $85 and reach $100, HOOD stock will need to break out of this falling wedge and get another dose of the “meme treatment.” At least, that’s how it gets there in the short term. It won’t be easy — and not even likely — but the possibility is there. 

If Robinhood breaks down instead of out, the $33 to $36 zone is within range. 

A Disrupter Is Here

Robinhood doesn’t have the fundamentals of some of the other more traditional retail brokerages, like Charles Schwab (NYSE:SCHW), Fidelity (NYSE:FIS) or even Morgan Stanley (NYSE:MS) after its acquisition of E-Trade. 

However, Robinhood has growth that all of these companies are envious of. Investors can hate Robinhood all they like and mock its customers as much as they want.

But the truth is, this company really tore down the hurdles to investing and made it easy for an entirely new generation to get involved in the markets. I think we should take a minute to appreciate that feat.

The company also changed the way the retail brokerage business operates. It led to a domino effect in commissions, as traditional players all jumped on the zero-commission bandwagon at once. Industry consolidation followed next, with Schwab buying TD Ameritrade and Morgan Stanley buying E-Trade. 

The question becomes, how will that growth translate to staying power and will Robinhood gain momentum in the future?

Breaking Down Robinhood

I think Robinhood stock can fetch some serious momentum, but that’s all it is to me: a trading vehicle. 

From an investment perspective, it’s hard for me to get overly bullish. Despite the lofty dip from the highs, shares still command a high valuation. With a current market capitalization of $42 billion, HOOD stock trades at almost 19 times this year’s revenue forecast. 

While that type of valuation is atypical for Robinhood’s business, it is a young company. With enough growth, this valuation can be justified. The problem is, where is that growth? 

While Robinhood had strong growth and did disrupt the brokerage industry, that growth is waning. Case in point, analysts expect revenue growth of just 18.5% in 2022. 

With less than $3 billion in revenue forecast for next year, earnings will be even more important. The company is forecast to operate at a loss this year and generate $1 in EPS next year. 

That might cut it, as shares currently trade at about 45 times next year’s earnings estimate. If it can grow the bottom line, that valuation may become more reasonable. However, it does get hard to justify that number the higher HOOD stock goes. 

All that said, as we’ve seen in the past, the valuation is not the end-all, be-all to a stock and it certainly doesn’t mean it can’t go higher. For Robinhood, follow the technicals.

If the bulls come back in force, this stock has the potential to really take off if it gets meme’d. 

On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.


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