Welcome to another edition of What Mattered. A collection of stories and narratives driving global markets.
The major indices in the U.S reached all time highs, again. A stellar job report yesterday, along with strong earnings by big tech drove both Nasdaq 100 and S&P 500 up.
In other developed markets, the EU has still been struggling to get out of the delta-variant overhang with most countries rethinking their reopening strategies. The UK underperformed, with good earnings reports from its index overweights like HSBC being offset by disappointing results from some others like Astrazeneca PLC and Unilever.
But the story making the rounds this week was Robinhood’s ($HOOD) long awaited IPO and how it got a taste of its own medicine.
The ultimate meme stock
Robinhood, the commission free trading app that allegedly turned investing into a casino made all the headlines during the Gamestop and AMC mania a few months ago. One of the reasons it was on the receiving end was its core business model. It makes almost 75% of its revenues from Payment for Order Flow.
It basically directs retail order flow (trades) to institutions and market makers like Citadel Securities and Virtu, which execute them to get a better price for their customers. The app that shouts out loud that it is ‘democratising finance’ sells retail orders for as their primary product. That plus the scandals it got itself embroiled into and the outages it faced earlier in the year. Looks bad.
Last week Robinhood became a public company seeking a $35bn valuation, and it did it in an unconventional way. It reserved a much larger portion of its 55 million shares for the retail investors (35% vs 10-15% generally). Robinhood users could apply for the IPO using its IPO Access tool. Time to reward the retail guys finally, and get some additional PR points maybe?
When I read this for the first I wrote down my thoughts about it, and what this move could ultimately lead to:
The IPO ‘pop’ could be much bigger due to retail involvement
Higher volatility around the first trading days
The pricing of shares could be affected, and $HOOD was likely to be bid-up due to lower institutional involvement (with better valuation and pricing knowledge)
The trend could catch on leading to more apps providing retail with higher proportion or early access of the hottest new IPO
In essence: $HOOD, the app that paved the way for retail investors to wield the power of memes and turn the markets into a game, could turn into the ultimate meme stock.
It was a disappointing listing by any means. The shares were priced at bottom of the range, giving it a valuation of $29bn. They ended down 8%, which was one of the worst starts to an IPO of this size, which kept everyone wondering if the excitement had already fizzled out.
Enter Cathy Wood and options contracts. The stock zoomed up 50% on Wednesday, and went as much as 82% higher. IN HOURS! Cathy Wood, the Ark Invest manager also bought a ton of shares adding to the momentum the stock had gained. Some analysts mentioned the new option contracts being responsible for such volatility.
Then on Thursday and Friday shares swung wildly back down almost 50%, all in one week! This came after the news that some of the early investors were cashing out and selling their shares.
Is it enough evidence to prove the hypothesis that Robinhood is itself turning into a meme stock? At least for now, till the crowd moves on to the next one.
What I think:
As far as investing in Robinhood goes, it looks like a risky bet. The bear case screams of regulatory risks, and it is one of those companies that will stay on the SEC’s radar for a long time to come. The regulator slapped one of the biggest fines ever ($70mn), for ‘causing widespread harm’ to investors very recently.
Then, while the PFOF model is allowed in the EU and the U.S (for now), this might stay a contentious issue for a while.
Its one those stocks whose fundamentals would maybe never converge to the stock behavior due to the innate ‘meme-ness’ of it.
One could argue that $HOOD is Antifragile, and it gains from volatility. It makes more money as its customers trade more frequently. But we’ve only seen how it has done in an environment when everything just keeps going up. If retail activity slows down in a downturn or a correction, fundamentals might not help as much.
One has to give $HOOD the credit for introducing all these young investors to the markets. Get them started. But instead of educating them of the right way to invest, it made this into a game, an online casino that’s always on.
User growth and revenues from crypto are some of the drivers I’ll be keeping an eye on for the next quarters. Why? I would love to be contrarian at this point, but cannot put my finger on how, yet.
Meanwhile, let them memes roll, please.
The Atomic Investor