Stocks to sell

Robinhood Markets (NASDAQ:HOOD) got off to a rocky start following its recent initial public offering. HOOD stock closed its first trading day down more than 8%.

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In the days that followed, Robinhood has skyrocketed to more than double its $38 IPO price. There’s no question Robinhood has been a tremendous success story as a company and is a very popular product.

However, HOOD stock IPO investors now have a golden opportunity to dump their shares at a huge gain. I believe they should take advantage of that opportunity immediately.

A Closer Look at HOOD Stock Growth

Without a doubt, Robinhood has put up some incredible growth numbers. The company reported a mind-boggling 309% revenue growth in the first quarter. It also said it had 18 million funded accounts, up from just 7.2 million accounts in March 2020.

Robinhood has also tapped into the coveted market of younger investors. The median age of Robinhood users is only 31.  That youth means there is plenty of room for the earnings power and wealth of these customers to grow over time.

But the question HOOD stock investors should be asking themselves is why? Why is Robinhood’s revenue up 309%?

When the pandemic hit in 2020, virtually all forms of entertainment were completely shut down. There was nothing to do. Many young adults received large stimulus checks they did not need, and they had nothing to do with that money.

With nothing else to do, stock trading became trendy among young people for the first time since the dot com bubble in the late 1990s. But this time around, social media and the pandemic compounded the explosion in stock trading among young people.

Long story short, Robinhood experienced a perfect storm of growth in 2020 that will likely never happen again. The chances Robinhood ever puts up growth numbers anywhere close to pandemic growth numbers ever again are virtually zero.

Robinhood’s Horrible Reputation

Sure, Robinhood has plenty of young users. But its reputation among those users is questionable.

When Robinhood temporarily restricted buying of social media meme stocks like GameStop (NYSE:GME), the company became public enemy number one on Reddit and Twitter. The irony is that now HOOD stock is clearly the top meme stock in the market.

Robinhood was recently fined a record $70 million by the Financial Industry Regulatory Authority related to “systemic supervisory failures” that led to outages of the Robinhood platform in March 2020.

Just one day before its IPO, Robinhood disclosed new probes by FINRA and the U.S. Securities and Exchange Commission related to potentially illegal Robinhood employee trading of meme stocks and the FINRA registration of CEO Vlad Tenev.

Robinhood is reportedly facing more than 90 customer lawsuits related to its lack of communication and decisions to restrict trading.

In other words, yes young people use Robinhood. But when they get to a point where they have real money to invest in the market, will they still trust Robinhood?

HOOD Stock Has an Insane Valuation

The biggest red flag of all for Robinhood right now is what seems like an uncomfortably high valuation. New Constructs CEO David Trainer recently highlighted just how overvalued HOOD shares are relative to peers.

Robinhood has just 18 million customer accounts with only about $5,000 in assets per account. Charles Schwab (NYSE:SCHW) has about 30 million customer accounts with about $223,000 in assets per account. At its current price, HOOD shares trade at a price-to-sales ratio of around 50. If you’re curious, SCHW stock trades at about 7.9 times sales.

Oh, and by the way – Robinhood is guiding for a net loss of about $500 million in the second quarter. Schwab reported a $1.27 billion net profit last quarter.

“We think the stock is worth no more than $9 billion and that Robinhood will likely not be able to continue the robust growth it saw in 2020 due to looming regulatory risk, increasing competition, and an undifferentiated service,” Trainer says.

No wonder New Constructs has an “unattractive” rating for HOOD stock. Trainer’s $9 billion valuation represents more than 85% downside.

How to Play It

I don’t know how accurate his valuation for Robinhood is. But I agree with Trainer’s sentiment regarding the risk of buying HOOD stock at its current price.

“Investors may have better odds of making money by trading risky meme stocks using Robinhood’s platform than by purchasing Robinhood’s overpriced stock itself,” he says.

He made that claim before HOOD stock became the biggest meme stock in the market, but you get the point.

If you’re looking to speculate on a volatile stock and want to trade HOOD stock, go for it. But long-term investors looking for a solid growth stock to buy and hold should look elsewhere.

On the date of publication, Wayne Duggan 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 Publishing Guidelines.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.