Robinhood has become part of the meme stock craze it helped create. What investors should know

Published Wed, Aug 4 20211:42 PM EDTUpdated Wed, Aug 4 20214:08 PM EDT

Robinhood's muted public debut is being turned on its head as the stock trading app experiences wild price swings. Investors and experts believe it has become part of the meme-stock craze it once helped ignite, with retail traders driving the eye-popping comeback rally. Robinhood closed up 50.4% at $70.39 per share, bringing its weekly gain to more than 100% on Wednesday. Shares of Robinhood touched $85 at one point, an 81% gain from Tuesday's close. Robinhood surpassed its IPO debut volume of 102.5 million shares, trading over 104.6 million shares by midafternoon. "It's become its own meme stock," said Wharton finance professor David Erickson. "I don't think this is a lot of institutional follow through." The delay in wild trading activity in Robinhood's stock acts as more evidence that buying pressure is likely coming from retail traders, according to Erickson. He said if institutions wanted to get in on HOOD, they would have bought shares last week following Robinhood's disappointing debut, where it dropped 8% after pricing at the low end of its range. "I don't think it's institutional investors that passed last week and are interested now," Erickson added. He also said it's possible some hedge funds have jumped in to take advantage of the volatility. As for the retail investors who didn't touch the stock last week, Erickson said they likely didn't want to "catch a falling knife" after the lackluster debut. Robinhood is largely seen as the gateway for young, inexperienced investors trading in speculative names like GameStop and AMC Entertainment. Now, Robinhood is the target of its own meme crowd. HOOD is the number one ticker on WallStreetBets tracker Swaggy Stocks, which indicates more than 700 mentions on the Reddit chat room. Robinhood was also the top traded stock on Fidelity on Wednesday morning. Robinhood allocated a historically high percentage of its IPO share to its retail clients, about 25%. "I expect Robinhood to be a short-term roller-coaster ride, because the business itself is volatile due to heavy reliance on trading which spikes and slows just like the Covid virus that has contributed to its growth the past year," said Greg Martin of Rainmaker Securities. "Additionally, the company is heavily followed and traded by the very investors it serves, who tend to be more short-term investors." The market will continue to struggle to find the right valuation for this company, which crosses between high growth software company and an e-brokerage business, Martin added. Currently, Robinhood trades at about 11 times earnings, while rival brokerages Charles Schwab, with a more diverse array of products, trades at seven times earnings. ARK Invest has also purchased north of 3.2 million shares of Robinhood since the IPO, a major vote of confidence from popular investor Cathie Wood. No short squeeze here Robinhood helped draw unprecedented levels of new, younger traders to the stock market during the pandemic. That surge has continued into 2021, marked by frenzied trading around meme stocks in January. Robinhood seemingly made some jaded ex-customers when it limited trading of certain securities during the GameStop trading mania amid increased capital requirements from clearinghouses. As for a short squeeze in Robinhood, S3 Partners told CNBC there has not been enough time for investors to accumulate a large short position in HOOD. This means investors in long positions are the main drivers of Robinhood's stock price volatility. "With over 170 million shares traded yesterday and so far today, it is obvious that any short squeeze of the outstanding shares shorted would have a minimal effect on HOOD's stock price relative to the amount of long side buying and selling," said Ihor Dusaniwsky, S3's head of predictive analytics. Robinhood is a five-time CNBC Disruptor 50 company and topped this year's list. Sign up for our weekly, original newsletter that offers a closer look at CNBC Disruptor 50 companies like Robinhood. — with reporting from CNBC's Gina Francolla and Kate Rooney.

Photo Illustration by Pavlo Gonchar

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