The Robinhood (NASDAQ:HOOD) share price exploded last week after a relatively lacklustre IPO. Despite seemingly low initial interest levels, the US trading platform quickly saw its stock rally. Last Wednesday, the Robinhood share price exploded more than 50% in a single trading day, reaching as high as $85!
The stock has since contracted down to around $55 per share. But that’s still around a 50% gain in a week. So what’s behind this sudden growth? Should I change my opinion on this company? If so, is it too late to buy? Let’s take a closer look.
The surging Robinhood share price
I previously explored Robinhood shortly after going public. But as a quick reminder, the business provides a mobile trading platform for retail investors to buy and sell shares, options and cryptocurrencies. Being the first major broker to remove its trading commission fees, the platform has become immensely popular with nearly 18 million users across America.
During its public debut, there seemed to be much uncertainty surrounding its Payment for Order Flow transaction model. This may explain why the Robinhood share price didn’t perform as the management team had expected. As far as I can tell, that uncertainty remains. But that didn’t stop ARK Invest’s Cathie Wood from buying roughly $45.2m worth of Robinhood shares.
The fund manager has gained a substantial following among retail investors in recent months. With tech stocks exploding in 2020, her funds under management achieved staggering triple-digit returns. From what I can tell, her conviction sparked a new wave of confidence that led to Robinhood’s 50% share price rise the following day.
I’m still not convinced
The firm undoubtedly has the potential to keep surging over the long term, especially since 2020 saw an enormous boost to interest in the stock market and cryptocurrencies. However, even with last week’s explosive surge in the Robinhood share price, my fundamental concern remains.
The Payment for Order Flow transaction model enables commission-free trading. But it also creates a conflict of interest between investors and the market makers (the firms that actually fill the buy and sell orders). This has led to a controversy that has even sparked an investigation by the Securities and Exchange Commission. Since Robinhood’s revenue is almost entirely dependent on this transaction model, any regulatory changes could have an enormous impact on the business, and consequently, the share price.
Final thoughts
I can’t deny the firm’s long-term growth potential. But Robinhood’s share price seems to be driven by speculation rather than fundamentals, I feel. With a market capitalisation of approximately $46bn, its price-to-sales ratio sits at 48.
Needless to say, that’s a high premium to pay for a business that could be navigating treacherous regulatory waters in the not-too-distance future. Therefore, I’m still not adding any shares to my portfolio today.
The post Robinhood’s share price explodes by 50%! Is it too late to buy? appeared first on The Motley Fool UK.
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More reading
- Robinhood shares soar 80% in one day! What’s going on?
- Why I ignored the Robinhood IPO
- Why did the Robinhood share price fall on its IPO?
- The Robinhood share price slumps post-IPO! Here’s why I’m not touching it
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of investment advice. Bitcoin and other cryptocurrencies are highly speculative and volatile assets, which carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
