Aug 4, 2021 - Economy & Business

The downside of Robinhood's upside

Data: YCharts; Chart: Axios Visuals
Data: YCharts; Chart: Axios Visuals

One definition of a meme stock: Any publicly listed company whose stock becomes a speculative vehicle beloved of retail investors armed with small-dollar Robinhood accounts. To no surprise, Robinhood itself has now become one of those stocks, just a few days after going public last week.

Why it matters: Robinhood is one of the most high-profile disruptive fintechs to have gone public. There's irony and symbolism to its stock price ceasing to be a reflection of corporate fundamentals and instead becoming a short-term gambling mechanism. But that transformation effectively removes an important valuation signal that investors might otherwise have found very helpful.

How it works: One thing that all meme stocks have in common is that speculators tend to flock to listed call options, rather than the shares themselves. (That's great for Robinhood, which makes far more money from options trading than it does from stock trading.)

  • Options on Robinhood stock started trading Wednesday morning, and within 17 minutes of the market opening, the share price had risen by 71% to $80.19 — more than double the IPO price of $38.
  • The stock closed Wednesday at $70.39, up 112% from its low last week of $33.25.

Our thought bubble: If activity in other meme stocks like AMC and GameStop is any indication, Robinhood shares have a lot of upside from here. That won't reflect fundamentals, but it's undeniably a fun game to play on your Robinhood app.

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