Don’t Make a Decision on Robinhood Stock Based on Yesterday’s News

Stock Market

Just when things couldn’t get any worse for Robinhood Markets (NASDAQ:HOOD), a report from the United States House of Representatives Financial Services Committee shows that the retail brokerage had far less liquidity than it suggested at the height of the meme stock phenomena. In the aftermath of that announcement, HOOD stock dropped about 5%, throwing some cold water on what was otherwise a good week that saw the stock climb about 10%. 

But is this really new news? I don’t believe so. It’s just confirming what was widely suspected. And for that reason, I think investors need to chuck it to the side before deciding to invest in HOOD stock. 

Ticker Company Price
HOOD Robinhood Markets, Inc. $8.63

Robinhood Faces Significant Obstacles to Growth 

Robinhood became a household name during the Covid-19 pandemic. A new group of retail investors who had time on their hands and stimulus money to spend flocked to the company’s app. And with low interest rates, low inflation and a rising market hopped up on liquidity.  

As the company admitted in its most recent earnings report, none of those conditions exist today. For this group of investors, this is the first time they’re experiencing the bad and the ugly of investing. And the company is seeing a decline in monthly active users.  

The company also faces the threat of persistent and growing competition. Robinhood is attempting to expand its offerings to make the platform more appealing. But it does feel like it’s trying to catch up at a time when investors are looking to invest in companies that have clear competitive advantages. 

Institutional Investors Are Still Buying HOOD Stock 

Robinhood received another body blow when the analyst firm Atlantic Securities lowered its rating on the stock from “neutral” to “underweight” and lowered its price target from $15 to $5. This was just the latest among a slew of firms lowering their price target for HOOD stock.  

So, it surprised me to see that institutional investment in the stock is still around 62%. And that is holding steady even after the company reported disappointing earnings in May.  

Whenever I see data like this, I’m reminded that you have to pay attention to what Wall Street does as much as to what it says. When they continue to buy a stock, there has to be a reason for it. Does this mean that investors should rush out to buy HOOD stock? I wouldn’t, but if institutions continue to have skin in the game, there’s something about the company that they believe in. 

Robinhood Remains a Speculative Investment 

One final area of concern is potential regulation regarding payment for order flow. This is what allows platforms like Robinhood to process commission-free trades. And the conventional wisdom is that if the company is forced to charge, they will lose customers to more established platforms.  

Of course, those platforms will have to charge for order flow, as well. And if it becomes a race to see who can charge the lowest price and still retain customers, Robinhood may come out stronger than expected, particularly as it continues to roll out new features that its customers are demanding.  

My takeaway is that I believe rumors of the platform’s demise are greatly exaggerated. It’s a compelling option for many retail investors who have limited funds and want the ability to invest. Those that want more sophisticated trading options are probably already elsewhere. And like sports betting, they don’t limit themselves to one platform anyway. 

But if you’re an investor who has been burned by the recent market sell-off, then you know that this is a time to invest in sure things. And I believe that investors can find better options.  

On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines. 

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019.

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