Cathie Wood Buys the Dip on Robinhood

ARK Investment Management, the firm headed by star stock picker

Catherine Wood (Trades, Portfolio), recently announced that it has picked up a large number of shares in Robinhood Markets Inc. (HOOD, Financial) following the company’s earnings miss on Tuesday, which caused the stock to fall more than 10%.

As of Oct. 28, the stock trades around $34.98, which is below its initial public offering price of $38. In fact, after its post-IPO surge broke the $70 mark in early August, the stock has been in steady decline.

While enthusiasm for the stock has waned since it first went public, compounded by a third quarter that disappointed on every front, Wood still believes in Robinhood’s story and has proven that commitment by scooping up shares as they fall. The company is a fairly young disruptor that is still in its growth stage, and it is extremely popular with younger generations, giving it significant upside potential.

A good fit for ARK’s strategy

ARK Invest picked up 2.2 million shares of Robinhood after its earnings flop. The allocations included 1,728,431 to the ARK Innovation ETF (

ARKK, Financial), an exchange-traded fund focused on disruptive innovation, and 192,038 to the ARK Fintech Innovation ETF (ARKF, Financial), which invests in fintech innovation.

The firm wasn’t just buying on the dip, however. Days before Robinhood reported its earnings, ARK’s funds picked up 836,000 shares, so as far as the disruptive investing firm is concerned, the stock is a buy regardless of whether or not shares fall further.

While paying a lower price for good companies is always nice, it’s not ARK’s focus. The firm is focused on disruptive companies that are changing the rules of the game for their respective industries. Companies that fit this bill can be difficult to identify, but getting it right means benefitting from skyrocketing earnings multiples followed by years or even decades of astonishing company growth.

Robinhood seems like a perfect fit for ARK’s strategy. It has achieved its success up to this point by appealing to younger generations and making investing more accessible to those who do not have the money or the experience to pay for brokers, or those who don’t have the time in their busy lives to jump through hoops for more traditional investing platforms.

It was Robinhood that first offered zero-commission trades, forcing other brokers to do the same in order to remain competitive. It also offers cryptocurrencies alongside stocks, which has attracted many more young investors to the platform even as other online brokers have done away with commission fees.

Its app-first interface is also appealing to many people, as having a smartphone has become more common than having a PC. Globally, 68.1% of all website visits came from mobile devices in 2020, and there were approximately 6.06 billion smartphones in use, which was three times the number of PCs.

Generational growth potential

Some argue that Robinhood has already reached its peak courtesy of the current bull market. After all, the more trades that happen on its platform, the more revenue the company generates, so if users are making fewer transactions, revenue could drop even as more users establish accounts. They might also claim that the young investors signing up for Robinhood will leave the investing sphere in droves once they experience their first bear market.

However, this argument assumes that the older generations will always remain the dominant force in the investing world, even though that certainly won’t be the case. Eventually, the younger generations will become the older generations, at which point their investing platforms of choice will become the “new normal.” If Robinhood can maintain its position as the platform of choice for younger investors, it stands to gain enormous market share simply from the natural course of its userbase accumulating wealth as they get older.

Wood also seems to be aware of the risk-taking trends among younger investors who have never traded in a bear market. Speaking at the CFA Societies Australia 2021 Australian Investment Conference, she said, “I guess the only one people might consider a meme stock that we own, or have ever owned, is Robinhood.”

While Robinhood itself may not have benefitted from a meme stock rally, the majority of the traders who pushed meme stock rallies in names such as GameStop (

GME, Financial) were retail traders on Robinhood. Frenzied crypto trading also pushed up the company’s second-quarter revenue so high that the third quarter was bound to be disappointing.

There will always be periods of higher trading in the stock market, though. This isn’t a generational thing. The bigger difference between older and younger generations is that younger people are more likely to consider investing to be a cool, fun use of free time and extra money, which could have good long-term implications for stock markets and brokers alike.

A rocky path forward

Robinhood does have the disruptive and generational tailwinds behind it, but that doesn’t mean its growth trajectory will be smooth. In fact, the company is still reporting losses in its bottom line, and its earnings are far more inconsistent that established financial giants like Charles Schwab (

SCHW, Financial).

In its third-quarter earnings release, Robinhood reported net revenue of $365 million, which was far below analyst estimates of $431 million and the company’s second-quarter revenue of $565 million. The loss per share was $2.06, which was worse than the loss per share of $1.37 that Wall Street called for.

Monthly active users also fell to 18.9 million, down from 21.3 million in the second quarter, again showing the popularity and volatility of crypto on the trading app. At this point, it’s undeniable that a significant part of Robinhood’s future will be tied to crypto, which could expand to other new asset classes as well.

If regulators were to take a swing at crypto, it would hurt Robinhood far more than other online stock brokers, but if crypto does become more widely accepted and utilized, it will become a significant growth engine for the company.

Robinhood also set out a bleak outlook for the rest of 2021, saying it expects fourth-quarter revenue to be no greater than $325 million, though it anticipates new accounts to total around 660,000, which would be in line with the third quarter.

“We question the ability of the company to generate competitive margins over time given the focus on such small accounts that have limited room to be profitable,” commented JPMorgan (

JPM, Financial) analyst Kenneth Worthington on Robinhood.

The road will not likely be easy for Robinhood given its focus on “letting the people trade” regardless of account size, its payment for order flow structure, its commitment to crypto and the struggles of the slow but steady generational transfer of wealth and transformation of financial structures. However, that’s exactly why the stock is falling now, providing those who believe in Robinhood’s story a prime opportunity to pick up shares at a lower price.