The pandemic forced the world to be out of work for months. This brought about a new wave of retail investors into the trading gig. Robinhood (NASDAQ:HOOD) stock was in the right spot at the right time. They captured much of the newbies and grew at an impressive rate.
There is also no denying the hoopla that Reddit traders stirred up. To a degree, perception was that they are Robinhood traders and that they mattered.
The company is not new, but it is new to Wall Street. They had many private funding rounds, so I would even consider them a unicorn. Their journey as a public company has been bumpy. In fact, just before the IPO, they had just earned a fine from FINRA. The platform had outages that caused investors losses. The regulators deemed it necessary for the company to pay restitution and fines.
Therefore, investors should have expected drama in HOOD stock. Those who did, did not have long to wait long because it rallied 140% within five days. Unfortunately for the bulls, it gave most of it back up. Today’s thesis is that eventually HOOD stock will do well in a bullish market.
Risk From Regulators Is Moderate
A few weeks ago, investors sold it in panic on a headline from the Securities and Exchange Commission. The rumor was that regulators were going to ban selling orders. If true, it would severely impact Robinhood’s ability to earn. However, my bet is that this was an empty threat.
The SEC was barking without the intention to bite. Banning a fundamental process would have repercussions far beyond Robinhood. The last thing that the government wants is to create drama where there is none. Nevertheless, Robinhood management is probably now on notice to behave itself.
Fundamental investors need to make a few assumptions when considering HOOD stock. It is still too young on Wall Street, so it needs time to earn confidence points. I am willing to give it the benefit of the doubt.
The popularity of the company’s platform is testament enough for me to have faith. This speaks to the competency of its team, so it’s wrong to call them a failure out of the gate. In 2014 they had 500,000 users, this year they are near 30 million. They almost doubled the count just since last year.
HOOD Stock Has Better Days Ahead
Overtime, the upside potential far outweighs the downside risk. If the bulls can break through $48 per share they will overshoot another $7 from there. Of course, it cannot rally on its own, so it needs the current stock market jitters to abate.
On that front I bet we are more likely to set new records in the S&P 500 than have a 20% correction. If I am wrong, then HOOD stock may have to deal with the negative drag from a market correction.
Even though the Federal Reserve has signaled its taper, there is still too much money to go around.
Furthermore, my interpretation of Fed Chair Jerome Powell’s comments last week is the Fed is still friendly to stocks. In 2018, they reversed course from tightening to loose monetary policy when markets needed it. If the current situation deteriorates, the Fed will bail Wall Street out of trouble again.
Tangible Proof of Concept
We know the user metrics are strong, but the Robinhood fundamentals are also solid. The top line growth is exponential, so far at a high expense. Profitability, for now, is not an issue, therefore I would give them a pass on that.
Statistically speaking, the 22 price-to-sales (P/S) ratio is reasonable. As long as the company’s growing fast, these metrics will normalize quickly. Case in point is what happened to Zoom Video (NASDAQ:ZM), where P/S fell from 125 to 25.
Investors who insist on “value” should avoid growth stocks. Amazon (NASDAQ:AMZN) serves as the perfect example that losing money is OK if it’s by design. The caveat is that management has to deliver on its growth promises. It’s too early to say that HOOD stock is not going to be that. Therefore, my assumption is that a bullish thesis is smarter than a bearish one from here.
Since volatility is high, I would suggest taking only partial positions.
On the date of publication, Nicolas Chahine 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.
Nicolas Chahine is the managing director of SellSpreads.com.