Cathie Wood Cuts Robinhood Holdings—Follow Her Lead or Stay Put?

Key Points

• Robinhood stock was in trouble after Cathie Wood decided to sell some of her stake in the company.
• The company's fundamental drivers are firing on all cylinders today, pushing the momentum into bullish territory for Robinhood.
• Wall Street analysts still see a double-digit upside in Robinhood stock, something investors need to consider moving forward.

Investors are reasonably worried when a mega investor decides to take action in a particular stock, especially when the action entails selling that stock. The problem is that markets will overreact to the news of someone getting out of a position without realizing that the meaning behind the decision might be more vague than they know.

Investors buy a stock with only one purpose: to make a profit. However, there can be several reasons for selling a stock. Selling can be done to lock in gains, improve a portfolio's tax burden, trim down an overweight position after a rally, or due to a shift in sentiment. Today, many are concerned about Cathie Wood from ARK Invest's recent selling of finance sector new riser Robinhood Markets Inc. NASDAQ: HOOD stock.

Now that the stock sold off by over 10% on the news and trades at only 87% of its 52-week high, investors who understand the true growth story in Robinhood stock might be looking at an opportunity to buy the dip and expose their capital to new potential gains in the market. However, a few of the fundamental tailwinds need to be covered first to decide whether Robinhood stock can, in fact, make a comeback rally.

Fundamentals Firing on All Cylinders Drive Robinhood Stock’s Value Higher

Investors need to justify future growth in Robinhood's business to form a potential bull case strong enough to buy the stock. Some of these metrics are common across any business, such as revenue, margins, and earnings. Starting with these simpler metrics, here's where Robinhood stands.

According to the latest quarterly earnings figures from Robinhood's press release, the company reported a record $682 million in revenues, a 40% jump over the past 12 months. With a high operating margin of 27.8% this quarter, the business was able to deliver impressive bottom-line profitability to shareholders.

Net income grew from $25 million in the same quarter last year to $188 million this recent quarter, a significant rise of up to 652%. Earnings per share (EPS) followed suit, of course, going from $0.03 a share to $0.21 in the same period.

Cathie Wood's selling of $5.7 million worth of Robinhood stock sounds counterintuitive given these massive growth figures, but there's more. A few other key performance indicators (KPIs) are driving today's (and tomorrow's) growth in Robinhood's business.

Here's the operating data report sent out by the company as of August 2024. Funded customers rose to 24.3 million this month, a one-million increase over the year and a 60,000 jump in the past month alone, showing momentum and growth in further adoption from retail investors.

Then, assets under custody (which allow Robinhood to further monetize on deposits) rose to $143.6 billion, up 60% over the year, driven by $37.5 billion worth of deposits. The more assets under custody Robinhood can keep attracting, the more fees and interest income it can generate, boosting EPS further.

Investors can see this trend in Robinhood's quarterly financial statements, where interest revenues rose to $539 million, up 22% from last year's $442 million. As each month reports higher assets under custody, this metric can be expected to grow as well.

All of this adds to the bull case that could push Robinhood stock’s value even higher, but how much higher?

Strong Momentum Continues for Robinhood's Business: Wall Street Is Watching

Robinhood is a controversial stock for Wall Street analysts to cover, as boosting its valuation and outlooks would essentially take attention – and capital – away from their own trading and brokerage platforms, but reality has to set in at some point.

Those at Bank of America seem to accept that reality, as analysts reiterated their Buy target on Robinhood stock as of August 2024. This time, the rating came with a price target boost as well, up to $32 a share, or a 20% upside from where the stock trades today.

While Cathie Wood was selling some of her Robinhood stake, those at Renaissance Technologies decided to add, this time boosting their holdings by 37.7% as of the last quarter, bringing their net position to a massive $173.8 million today.

Investors seem to have enough reason to call out Cathie Wood on her seemingly bad timing. Here’s one more tailwind for investors to watch as well:

As the Federal Reserve (the Fed) cuts interest rates further, yields on savings accounts are also set to decline, driving retail investors to platforms like Robinhood to put their money to work in hopes of better returns on their savings.

This is why management has recently launched their “Legend” web-based trading platform, accommodating the billions more in assets coming to Robinhood, boosting its future EPS growth further.