Following on from a slower IPO arrival, shares in the popular investing app Robinhood (HOOD) have been soaring - illustrating the influence of the platform and its band of merry retail investors.
Robinhood’s IPO expectations had been scaled down ahead of its floatation, but following an extraordinary resurgence, the stock is now trading well ahead of its price upon launch. At the time of writing, Robinhood has rallied by more than 75% following its debut, and much of the fears surrounding the platform’s rocky arrival appear to have alleviated.
The revival is perhaps unsurprising considering the sheer power of Robinhood’s growing user base. Although the app has rarely been out of the headlines, the more its name appears in the media, the more its trading volume grows.
According to CB Insights, Robinhood’s monthly active users rocketed towards 20 million at the beginning of 2021. During this time, the app was embroiled in the GameStop short squeeze, where investment in the meme stock led to a GME price rally of 1,500% which forced Robinhood to place restrictions on the accounts of its users.
Although the move to restrict shares led to some investors voiding their concerns, the time Robinhood spent in the headlines appears to have made its user base stronger. Let’s take a deeper look at why Robinhood appears to be unstoppable:
Empowering Retail Investors
Although the platform is no stranger to controversies surrounding the freedom of its users, there’s plenty of evidence that shows Robinhood is committed to its goal of ‘democratizing finance for all.’
This statement may seem strange to the investors the app shut out of the GameStop short squeeze, or those who have found themselves the victims of the app’s alleged moves to bring gamification to investing - or even those who have been misled by Robinhood in the past. However, no platform has resonated better with individual investors than Robinhood. While platforms like E-Trade, TD Ameritrade and Charles Schwab are all accustomed to investor account sizes of over $100,000, Robinhood’s average account size of $3,500 shows that it’s the place to go for retail investors.
Furthermore, the company took a big risk in opening a large portion of its IPO up to the public through the app’s very own IPO Access portal.
In a largely unprecedented move, Robinhood took the decision to open up between 20% and 35% of its IPO shares to its own user base. As Maxim Manturov, head of investment research at Freedom Finance Europe (Freedom Holding Corp. (Nasdaq: FRHC)) notes: “historically, institutional investors get around 90% of all shares, with only around 10% left for retail trades. This is where allocation comes from: when the demand is high, the broker will have to reduce order amounts so as to at least partially fill all of them. The allocation ratio, meanwhile, depends on the investor trading activity and volume.”
As it transpired, 301,573 Robinhood users decided to participate in the platform’s IPO, representing around 1.3% of its total customers. Although it may be argued that Robinhood would’ve seen better volumes arriving into its IPO if more shares were reserved for institutional buyers, the bold move of opening such a heavy proportion of the company up to retail investors indicates that Robinhood intends to make good on its promise of democratization - and could help to spur on more loyal stockholders further down the line.
Immersing Into the World of Memes
There’s a growing argument to be made that Robinhood’s recent surge in price is due to a leg up from the meme investors the app typically hosts. Trading in HOOD was halted less than a week on from its launch as the stock climbed over 70% in early trading to $85 per share - a rise of 120% from its IPO debut price. Shares ended on that particular day up 50%, at $70.39 - though the stock was falling more than 7% in after-hours trading.
Fundamentally, this price rally came through no direct involvement of the company, but from huge levels of social media sentiment - indicating that the platform has become its very own meme stock.
According to data from social media sentiment tracker, HypeEquity, mentions of Robinhood’s stock had climbed a monumental 23,000% on the Tuesday after its launch, and continued to grow into Wednesday.
The sentiment towards the stock was largely bullish, with keywords like ‘option’ and ‘buy’ closely positioned near mentions of the company name. However, the complexity of Robinhood’s relationship with retail investors is also laid bare across social media, with some individuals opting to steer clear of the app.
After the initial price hike, CelestialProphet, a commenter on the Reddit group r/WallStreetBets, noted that it “feels good to have actually gotten out with some gains this time. Good luck to those still playing HOOD.” While others took an altogether more bullish view, claiming that “HOOD will be 120 or 40 [end of day] and I’m here for it.”
Robinhood may not have intended to become the latest Wall Street meme stock, but for an investing platform that rarely strays from the headlines, it seems inevitable that the price of the company’s shares were always going to be heavily sentiment-based.
It seems the app can still rely on its huge band of merry retail investors to give its price a boost just when it needed one the most.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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