Why is Cathie Wood buying Robinhood shares?

Ark Invest’s CEO and CIO Cathie Wood bought a $16.4m stake in Robinhood [HOOD] after the stock fell more than 5% on 20 September. The investment firm managed to nab 404,020 of Robinhood shares with the move. Buying while the share price was down managed to save Wood around $700,000 on the day, compared to the stock’s previous close.

Wood often employs a buy-the-dip tactic in her investment strategy and has frequently increased Ark’s holdings of top growth stocks during short-term declines, including Bitcoin [BTC], Zoom [ZM] and Peloton [PTON].

The latest market sell-off was set in motion following fears that Chinese property development giant Evergrande [3333.HK] wouldn’t be able to pay off its $300bn debt ahead of a looming payment deadline (and which it eventually missed).

However, while the markets have stabilised somewhat, analysts remain cautious of how the global economy could be affected if Evergrande was to fail, with the company now in a 30-day grace period. Speaking at a Bank of America conference on 22 September, Noel Quinn, CEO of HSBC, said it would be “naive to think that the turmoil in the [property] market doesn’t have the potential to have second-order and third-order impact, particularly on the capital markets and the bond markets.”

How Robinhood shares have been performing

Regardless of the situation unfolding in China, Robinhood’s share price has, for the most part, been following a downward trend since its market debut on 29 July 2021. Even on its first day on the market, Robinhood shares opened at $38 but closed 8.4% lower at $34.82.

At its peak, Robinhood’s share price reached an all-time high of $85 during intraday trading on 4 August, before closing at $70.39 — up 102.2% since its debut. The price didn’t stick though, and the next day the stock fell 27.6% to close at $50.97.

Robinhood’s share price has continued to fall since, although the news that Ark has bolstered its investment in the company seemed to have a positive effect on the stock. Robinhood’s share price gained 15.2% in the two days following the sell-off and, as of its last close of $42.08 on 30 September, was up 19.72% since the end of July.

One of the factors pulling Robinhood’s share price down is that Gary Gensler, chair of the US Securities and Exchange Commission (SEC), is considering banning payment for order flow, reported Barron’s. This is a practice where brokers send trade orders to market makers that execute the trades in return for some of the profit.

“We think payment-for-order flow is a better deal for our customers, vs. the old commission structure. It allows investors to invest smaller amounts without having to worry about the cost of commissions” - Jason Warnick, CFO of Robinhood

Despite the possibility, Robinhood doesn’t think the ban will come to fruition. “We think payment-for-order flow is a better deal for our customers, vs. the old commission structure,” said Jason Warnick, CFO of Robinhood. “It allows investors to invest smaller amounts without having to worry about the cost of commissions.”

Naturally, some analysts and investors would be worried about such a ban as the payment for order flow makes up a large proportion of Robinhood’s revenue. However, Wood also thinks a full ban on the practice is unlikely.

“We actually think that not much is going to change there because the system has been so good from an execution point of view for the end investor,” Wood said. “So, we'd be surprised to see a lot of change on that front. But again, we're in a situation where we have to listen to what the SEC is saying."

How is Robinhood’s share price performing?

In its second-quarter earnings report, released on 18 August, Robinhood posted a loss of $2.16 per diluted share, compared to earnings of $0.09 per diluted share the previous year. Despite the loss, total net revenues reached $565m for the quarter, which was up 131% from the year-ago period when revenues were $244m.

The growth in revenue has been partly attributed to the wide and increasingly aggressive adoption of crypto trading, with the company reporting that more than 60% of “net cumulative funded accounts traded in crypto during the second quarter”, adding that a great share of users placed their first trade in crypto rather than equities.

As part of a press release, Robinhood stated that many factors worked in its favour for the three months ended 30 June and, as a result, it experienced a “very strong quarter with record revenues”.

Despite strong earnings, the company has set its third-quarter guidance to account for “seasonal headwinds and lower trading activity,” which will “result in lower revenues and considerably fewer new funded accounts” than during Q2.

While comparatively weaker earnings could lead to a dip in Robinhood’s share price performance, the consensus rating among 14 analysts polled by CNN Money sits at buy, a rating held by six analysts.

Among 14 analysts offering 12-month share price forecasts on CNN Money, the median target is $55.20, with a high estimate of $84.20 and a low of $35. The median estimate would represent a 31.3% increase from Robinhood’s share price close on 30 September.