Robinhood shares have ‘high meme-stock risk’, says analyst

• Robinhood Markets (Nasdaq: HOOD) share price tumbles to US$53.94 per share on Tuesday (10 August 2021)
• Certain early investors may sell almost 98 million of their shares over time
• The news prompted profit-taking among some individual investors
• The stock gained 8% last Friday after a turbulent week
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Robinhood's stock price turbulence continues

Following a roller-coaster week with wild swings, shares of retail favourite Robinhood Markets slid 5.1% to end at US$53.94 on Tuesday. The HOOD counter had gained 3.3% on Monday.

Robinhood plummeted 27.6% last Thursday, after a filing showed that more than a dozen early investors would be able to sell their shares over time. Nonetheless, retail investors made net purchases of US$8 million in Robinhood shares on the same day, according to Vanda Research.

The stock then gained 7.9% last Friday to cap off a turbulent week, which saw Robinhood adding billions of dollars to its market value.

Sentiment aggregator Swaggystocks last Friday said Robinhood was the most discussed company on Reddit’s Wallstreetbets page.

What halted Robinhood’s winning streak?

The online brokerage last Thursday said that its early investors may sell up to 97.9 million shares over time, which prompted the stock price to tumble, snapping its four-day rally.

None of the proceeds will go to Robinhood; the selling stockholders will receive all of the funds from the sales.

The latest filing sparked concerns among retail investors and led to some of them taking profits, even though the potential sales were already stated in the IPO prospectus in early July, said National Securities strategist Art Hogan.

The insiders that proposed to sell the large chunk of shares included venture capitalists who took convertible shares about six months ago at deep discounts in return for rescuing Robinhood from a margin call, Bloomberg reported.

However, these insiders would only be able to start selling their holdings after receiving clearance from the US Securities and Exchange Commission. That can only take place after Robinhood files its quarterly earnings, which would likely be 18 August 2021, the company said.

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Will Robinhood shares continue to surge?

Buying activity from retail investors increased over the past week, and could be key in fuelling the stock price higher, said Vanda Research.

‘If retail investors start withdrawing money from tired meme stocks to buy HOOD, there's still room for the move to continue,’ it added.

Wolfe Research initiated coverage with a ‘peer-perform’ rating, equivalent to ‘hold’, and a US$45 price target.

However, Wolfe advised caution as it ‘cannot in good faith recommend investors get involved in HOOD on either the long or short side’ because there is ‘high meme-stock risk with outsized retail involvement’, which suggests the stock may not trade on fundamentals.

Private equity firm Patriarch Organization’s chairman Eric Schiffer said retail investors ‘need to recognise that this is going to trade like a crypto or other meme-related stocks in the short run and they could see significant positional changes’.