Today’s Action: Buy the Message but Short the Messenger

Shah Gilani|August 19, 2022

Robinhood Markets, Inc. (HOOD) deserves national recognition – or, even better, a global shout out – for democratizing finance for all, which is their mission statement and the kind of messaging I’m 100% behind.

HOOD (and all that stimulus money from 2020) created the dawn of a new era in which retail traders, regular everyday people, had institutions on the run. But now all that extra cash has dried up and HOOD, the heralded messenger of democratic finance, is in trouble.

With all that is happening right now, the smart, democratized investors that this era created are now going to push Robinhood’s stock down a lot lower than where it is today…

And we could see 100% profits on HOOD’s next leg down.

Ahead of the Pack

I love Robinhood for being the first brokerage to offer 100% commission-free trading.

The company, founded in 2013, launched its commission-free trading platform for stocks and ETFs in 2015. That shook the rest of the brokerage world out of their boring stupor.

Within a few years, Charles Schwab, TD Ameritrade, and Interactive Brokers had gone commission-free. By the end of 2019, E*TRADE, Fidelity, and everyone else had followed Robinhood’s path.

Robinhood led the way on fractional shares. Like pennies from Heaven, out of a clear blue sky, investors could suddenly buy a fraction of a share of a stock, any stock. F or example, you can now buy $50 worth of Berkshire Hathaway, a stock trades for around $457,700 a share – and you have Robinhood to thank for that.

In my opinion, that’s bigger and more democratizing than even commission-free trading.

And Robinhood led on commission-free options trading, then commission-free cryptocurrency trading.

In 2020, they introduced automatic recurring investments and, in May 2021, HOOD offered mom- and- pop retail traders and investors access to coveted IPOs.

In short, Robinhood should be lauded for being the true democratizer of trading and investing.

Their timing happened to be perfect, too.

When COVID kept people at home and instilled a fear of the future in everyone, but more so in millennials and Gen-Z who wondered how they’d make a living in the dark shadow of a full-blown pandemic, tens of millions of retail investors opened trading accounts, more than ten million of them at Robinhood.

Venture capitalists and institutional investors threw money at a raging Robinhood, giving it an almost $10 billion valuation by the time it went public at the end of July 2021.

Only days after IPOing at $38 a share Robinhood traded at $85, giving the company a market capitalization over $71 billion.

And then the bottom fell out.

Some of the drubbing Robinhood and its stock took came from better positioned and better capitalized competition, some of it came from regulators and politicians who lambasted the “gamification” of investing, some of it from critics of payment-for-order-flow who still like to rail against commission-free trading as being misleading on account of brokerages selling their order flow which makes them money in lieu of charging commissions.

Whether the retail trading bonanza Robinhood championed and rose to incredible heights on was going to slow down when stimulus checks stopped flowing, or when cryptos crashed, or when retail traders and investors came face- to- face with a buy- the- dip opportunity that turned into a full-blown bear market, or because most analysts and institutional money managers were calling for higher inflation and more rate hiking, almost doesn’t matter. That’s because the slowdown in retail trading’s been impacted by all those headwinds and would have happened eventually.

It just all happened in succession and hit Robinhood harder than any other brokerage.

Then there’s the issue of money…

A Fat Coin Purse Full of Holes

Robinhood’s not profitable. It’s never turned a profit.

Its latest earnings report was more of the same. For the second quarter of 2022, the company lost 34 cents a share, which was sequentially better than the first quarter of the year when they lost 45 cents a share.

More to the point, as far as retail trading, equities trading decreased 19% sequentially. Options trading decreased 11%. Monthly active users fell by 1.9 million to 14 million. And the stock fell too.

The worst picture of Robinhood is up at Yahoo Finance for everyone to see. Yahoo’s statistics page shows Robinhood’s $1.35 billion in trailing 12-month revenue being accompanied by a profit margin of negative 180% (ouch!) and a net loss to common shareholders of more than $2.43 billion. That’s ugly.

As much as I love Robinhood for their democratization of trading and investing, I wouldn’t tough their stock with a ten-foot pole.

In fact, we just bought a put spread on the company in one of my subscription trading services.

The only reason we didn’t short the stock is because there are rumors out there that someone, maybe Sam Bankman-Fried of FTX cryptocurrency exchange fame, who has acquired a position in the stock, might go the distance and take it private. I say good luck with that, though we’d be foolish to spit into the wind on that rumor, because you know those crypto guys are crazy.

We bought a put spread we expect to make at least 100% on, in short order.

As much as I like Robinhood, I like making money on its stock more. If you’re a retail trader who appreciates Robinhood and your democratized trading even more, you might want to look a couple of months out and buy yourself a put spread with strike prices below $9.00, $8.00, $7.00, maybe even $6.00, if you want to make a killing on Robinhood doing the right thing and succumbing to the retail crowd who know its real worth.

Happy trading,

Shah