When it comes to Robinhood Markets (NASDAQ:HOOD) stock, count Cathie Wood as a solid bull.
Wood is on a buying spree for Robinhood stock. Her Ark Innovation ETF (NYSEARCA:ARKK) bought another 487,263 shares of HOOD stock on Jan. 6, bringing her exchange traded fund’s (ETF) total holdings to 13.94 million shares.
The ARKK exchange-traded fund has been a regular buyer of Robinhood stock, buying shares 11 times just in the fourth quarter of 2021. The Jan. 6 transaction was the fund’s first with HOOD stock in 2022 — but it more than likely won’t be the last.
A recent strategy shift points to a hopeful future for this somewhat battered retail trader-centric platform. Let’s take a closer look.
How Robinhood Makes Money
Robinhood is a favored platform for retail traders, with an estimated 22.4 million users in as of the third quarter of 2021. Even though the company launched in 2015, some traders could use its platform as early as 2014.
The platform is so popular because of its incredibly easy to use interface and free trading. Trades of stocks, options, ETFs and cryptocurrencies are executed with no commission, which makes Robinhood attractive to retail traders and those who like to make frequent moves.
It makes money by routing orders it receives to market makers to receive payment for order flow. It generates a small payment from market makers for every order it sends — just fractions of a penny per share.
In the third quarter of 2021, Robinhood said that its transaction-based revenues rose by 32% from a year ago, reaching $267 million versus $202 million in Q3 of 2020.
Much of that increase was from cryptocurrency trades, which rose 860% to $51 million, versus just $5 million in the third quarter of 2020. In contrast, trades of equities dropped from $69 million in Q3 of 2020 to $50 million in the third quarter of 2021. That’s a drop of 27.5%.
A Difficult 2021 for HOOD Stock
With its dynamic growth and its popularity among retail stock traders, you’d think that HOOD stock would be a no-brainer. But it hasn’t quite worked out that way.
Robinhood went public in July 2021 at $38 per share. And sure, it was really popular. But the stock price hasn’t held up. In fact, HOOD stock is down more than 50% from its initial public offering (IPO) price, currently trading for about $16 per share.
Maybe that’s one reason why Cathie Wood is so bullish on snapping up as many cheap shares as possible.
Barron’s notes that when Robinhood first began trading, the stock was valued at roughly 20x its price-sales ratio. It called that a “wildly inflated valuation based on earnings that are still years away from fruition.”
Now shares are trading at about 7x sales, which is a more reasonable cost. But is that the only reason to be looking at HOOD stock at this point?
Robinhood Is Changing Its Strategy
One of the quickest ways to get turned off investing is to make silly mistakes early in your investing career. That’s one of the reasons why I cringe at the investors who piled into GameStop (NYSE:GME), AMC Entertainment (NYSE:AMC) and other meme stocks. Those investors are hoping to force a short squeeze and make history through wildly speculative bets that have no basis in reality.
Critics of Robinhood say the company’s app makes investing seem too much like a game. I don’t know if I buy that, but I do think that the best way to keep investors engaged about growing their portfolios is to give them some actual tools to do the job well.
Robinhood is starting to do that now. And I think it’s great.
Last week, Robinhood announced a new effort called “First Trade Recommendations.” New customers will get an option to receive help investing. Those that opt in will be asked to fill out a questionnaire about their how much risk they’re willing to take, their goals and their investing timeline.
After that, Robinhood will give participants a personalized suggested portfolio of four ETFs featuring U.S. stocks, developed market stocks, emerging market names and U.S. bonds.
In a separate announcement, Robinhood announced the hiring of Steve Quirk as chief brokerage officer, a new position for the company. Quirk was previously executive vice president of trading and education at TD Ameritrade. He will now be overseeing Robinhood’s broker-dealers, Robinhood Financial and Robinhood Securities.
The Bottom Line on HOOD Stock
Robinhood today trades for a much more reasonable valuation than it did at its IPO. I appreciate that it’s making more of an effort to educate investors rather than just turning them loose to sink or swim on their own.
And the importance of Quirk’s hiring cannot be overstated. Robinhood had (and has) a lot of tech people running the show. That’s surely helped in creating the user-friendly interface. However, bringing in someone to put a seasoned hand at the helm of the company’s investment portfolio is a welcome move.
Robinhood has already shown it can make investing easy and fun. Now it’s making moves that shows that the company is also interested in its customers long-term success as well.
That’s exactly what Robinhood needs to turn today’s novice investors into next year’s loyal, experienced customers. If successful, that would be a winning formula for HOOD stock.
Maybe Cathie Wood is on to something after all.
On the date of publication, Patrick Sanders 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.
Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders.
