Daily Brief - Boyz n the HOOD: hedgies are winning! (Nov 30, 2021)

Updated: Dec 6, 2021

Since it peaked at $70.37 last August, HOOD shares have fallen by just over 60%. The abysmal stock performance of late has given short sellers a $253 million mark-to-market windfall.

The IPO opened at $38 per share in July so if you held it since then, your investment would have decreased by roughly -26.32% over the past four months.

There is ample irony in this. “Short sellers shall fail!” was the rallying cry of meme stock traders who relied on Robinhood to carry out their short squeeze trades. Now, the reviled short sellers seem to be feasting on the decline of the platform that enabled the revolution.

Is this an opportunity to bet on the turnaround?

Cathie Wood’s ARK has been betting yes. They have been steadily buying shares in HOOD as they sold down their stake in TESLA. Meanwhile, over at Seeking Alpha they’re less convinced of the merits of buying this dip.

They highlight a few red flags. One is that the previously skyrocketing YoY growth in funded accounts - they grew by 11 million - declined sequentially for the first time in Q3. Another point of concern regards monthly active users (MAUs): this number declined -2.4 million from Q2 to Q3 even as it grew 8.2 million since last year. As Seeking Alpha writes, “HOOD is supposed to be a growth company, yet the trends are going in the wrong direction, and that's alarming.”

Finally, policy headwinds are also emerging. HOOD pioneered commission-free trading. Its premise revolved around democratizing finance for all. This resonated with many investors and it became the platform of choice for most new investors. But democratization came at a price: the company funded “free” with the payment for order flow mechanism. In effect, it was selling your orders to market makers like Citadel who in turn could profit from that information. These payments accounted for more than 80% of Robinhood’s revenue.

However, the SEC has openly entertained banning the practice. That will be a big test for HOOD and numerous imitators that have sprung up since. Short sellers are betting they won’t be able to adapt as easily as they claim.