The Secrets of (NYSE: HOOD): Picks & Shovel on Meme Stocks

The Secrets of (NYSE: HOOD): Picks & Shovel on Meme Stocks

Forget about Gamestop (NYSE: GME) and AMC Entertainment (NYSE: AMC). Robinhood Markets is an easy way to invest in the comeback of meme stocks.

With the meme stock craze potentially reigniting, investors are once again considering shares of some of 2021’s top meme stocks.

However, rather than chasing shares of a certain meme stock, the smart way to participate in the theme of retail investors returning to the market is to invest in Robinhood Markets, which will continue to profit from the influx of retail investors and increasing trading activity.

In this respect, Robinhood might be viewed as a pick-and-shovel approach to betting on a rebound in retail activity. Unlike Gamestop or AMC, I feel it is a wonderful stock on its own and does not require a short squeeze to move higher.

I’m bullish on Robinhood stock because of its strong user and deposit growth, its position as a pick-and-shovels play on rising retail investor activity, and its successful expansion into new markets such as IRAs and credit cards. The latter goal is to develop Robinhood from a retail brokerage into a complete financial powerhouse.

Meme Stock Reawakening

As you’ve probably noticed, Keith Gill, aka Roaring Kitty, the mastermind behind Gamestop’s enormous 2021 rally that sparked the original “meme stock” craze, returned to the site after a multi-year absence with a Tweet. Many investors saw this as a signal to buy Gamestop and other meme stocks from that era, sending their shares skyrocketing this week.

However, the majority of these investors would concede that this is a failing company with disappointing long-term prospects, and the stock carries a significant risk of loss. For example, the GME stock’s price objective of $7 indicates that, despite the recent pullback, the stock still has 68.5% downside potential (see below).

Meme Stock Reawakening
Meme Stock Reawakening

Picks-and-Shovels Play

Robinhood, as the preferred brokerage app for many new and retail investors, is well-positioned to benefit from an infusion of new traders and increased trading volume. Currently, Robinhood is the #11 finance app in Apple’s App Store, lagging everyday payments apps like Cash App and Venmo but outperforming Fidelity, Charles Schwab (NYSE: SCHW), and Wells Fargo (NYSE: WFC), a significant accomplishment for the much smaller company.

Robinhood recently announced new stats for April, which suggest that business is booming. An amazing 90,000 clients established accounts this month, bringing Robinhood’s total to 24 million.

Furthermore, deposits totalling $4.9 billion were given to Robinhood. This shows a 45% annualized growth rate as compared to March. With this infusion, the company’s deposit base has grown to $27.4 billion from April 2023, which is a 35% annualized growth over the previous 12 months.

Remember too that these numbers come before the May commencement of the meme stock frenzy. As more retail investors return to the market or are drawn in by the wild swings of meme stocks for the first time, Robinhood’s user and deposit growth should continue.

Based on “(1) rising retail engagement and accelerating organic growth; (2) positive operating leverage after large expense reductions; and (3) attractive valuation following increases in EBITDA/EPS,” Bank of America Securities upgraded Robinhood twice, from Underperform to Buy, as a result of this growth. The price goal that Bank of America set for Robinhood was raised from $14 to $24.

Aside from meme stocks, Robinhood has advanced significantly in terms of platform development, market penetration, and user-centred financial ecosystem development. sc de d

Attacking New Verticals   

The Robinhood of 2021 is not the same as it was during the previous meme stock craze. The stock has done well since I wrote about Robinhood’s underappreciated evolution into a full-service financial ecosystem a few months ago. With the introduction of IRAs last year, Robinhood has aggressively entered the market by matching deposits made by rollover customers up to 1% and deposits made by Robinhood Gold members up to 3%.

By using these strategies, it is able to draw clients away from rival businesses. According to CEO Vlad Tenev, the company saw “net asset inflows from every other major brokerage — totalling $3 billion, more than twice our Q4 level” in the first quarter, which was the second consecutive quarter of such inflows.

With the introduction of its forthcoming Robinhood Gold card, which will be one of the products included in its Robinhood Gold subscription service, Robinhood is also creating a stir in the credit card industry.

The striking 17-gram gold card, composed of stainless steel, gives customers limitless 3% cash back on all purchases. More than a million people have registered for the Gold card queue, according to Tenev, who also said, “As we roll out the card, we can substantially grow Gold adoption.” With barely half of those on the waitlist currently having Gold memberships, the card may be a significant growth driver for Robinhood Gold membership.

Tenev reports that after 260,000 new members signed up, the number of Robinhood Gold users reached 1.7 million in the first quarter. By introducing these additional products, Robinhood is astutely capitalizing on its brokerage business’s success with retail investors to expand into other markets, grow its clientele’s wallet share, and achieve more expansion.

Analysts: Is Robinhood Stock a Good Buy?

Looking to Wall Street, HOOD receives a consensus recommendation of Hold based on ratings given within the previous three months which were four Buys, eight Holds, and four Sells. At $20.86, the average HOOD stock price target suggests a 3.8% possible upside.

Looking to Wall Street, HOOD
The Secrets of (NYSE: HOOD): Picks & Shovel on Meme Stocks 4

The Takeaway: An Up and Coming Financial Powerhouse

If there is a rebound of retail investor activity, Robinhood may be the greatest option to invest rather than going after a stock like Gamestop during this meme stock recovery. Because of Robinhood’s impressive user and deposit growth thus far this year, as well as its strategic positioning to capitalize on future growth as more retail investors enter the market, I am positive on the company.

Furthermore, the company’s growth and momentum in these profitable categories, such as credit cards and IRAs, have the potential to eventually turn it from a retail brokerage into a real financial juggernaut. This, in my opinion, makes it a desirable long-term investment prospect.

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