Given the recent weakness of cryptocurrencies and my belief that they could fall much further, along with the extremely elevated valuation of Robinhood stock (NASDAQ:HOOD), I recommend selling HOOD stock at this point.
Also making me bearish on Robinhood stock stock at this point is my belief that U.S. stocks could easily decline 10%-15% in the near-to-medium term.
HOOD Will Be Hurt by Crypto’s Weakness
On April 11, Citi cut its rating on HOOD stock to “sell” from “neutral.” According to Citi, the shares had gained 44% in 2024 primarily because of increases in the price of Bitcoin (BTC-USD).
Meanwhile, as of the afternoon of April 15, Bitcoin had tumbled about 15% from its 52-week high of over $73,600 reached just last month. And Ethereum (ETH-USD) had sunk about 25% from its high of over 44,080 which was also attained in March.
The huge downturns, along with recent comments by Fed President Neel Kashkari, make me believe that Washington may soon take action to crack down on cryptos. In a recent interview, Kashkari said that Bitcoin lacks any “actual utility in the economy, other than being a nice toy that some people enjoy owning and trading.” He added that the cryptocurrency is being utilized to “subvert banking regulations, get around either marijuana banking, or [conduct] illicit activities.”
Although I believe that cryptos are being undermined by rising interest rates and the stock market’s recent downturn, I think there’s a meaningful chance that Kashkari’s comment could foreshadow a new crackdown by Washington on cryptos.
Increasing my belief in this hypothesis, multiple stocks closely linked with cryptos’ value have tumbled in recent days, with Coinbase (NASDAQ:COIN) sinking 13% over the last five trading days and Microstrategy (NASDAQ:MSTR) giving back 11.7% during the same period.
In any case, to the extent that Citi is correct about the rally of Robinhood stock this year being largely due to Bitcoin’s surge, HOOD is likely to sink a great deal if cryptos continue to fall going forward.
Robinhood’s High Valuation and a Likely, Further Pullback by U.S. Stocks
In the five days that ended on April 15, HOOD stock fell7.4%. Nonetheless, the shares have a huge price-sales ratio of 8.6 times and a very high forward price-earnings ratio, based on analysts’ average 2024 earnings per share estimate, of 61 times.
Further undermining the name’s short-term outlooks, I believe that U.S. stocks could easily drop 10%-15% in the next few weeks. Such drops, known as corrections, occur in the course of a high number of years. Among the negative catalysts that could spark a correction now are geopolitical tensions in the Mideast, rising interest rates, increasing oil prices, and stubborn inflation levels.
Also worth noting is that, although stocks’ valuations are not very high now on a historical basis, they are somewhat above average. As a result, a correction would certainly not be very surprising at this point.
And since Robinhood generates most of its revenue from the buying and selling of stocks, while interest in trading equities is almost always higher when they’re going up, a correction would probably cause Robinhood’s shares to fall meaningfully.
Significant Selling of HOOD Stock by the CEO, Cathie Wood
Making me more bearish on HOOD stock is the fact that the company’s CEO and well-known investor Cathie Wood have both unloaded meaningful amounts of the firm’s shares in recent weeks.
On Feb. 26, Robinhood CEO Vladimir Tenev dropped 500,000 shares for $15.119 each. The transaction was reportedly carried out in the context of a planned, automatic sale. Still, I’m sure Tenev could have cancelled the sale but he chose not to do so.
Much more ominous was Wood’s decision last month to get rid of 1.6 million shares for $31.5 million, suggesting that she may be starting to lose confidence in its outlook.
On the date of publication, Larry Ramer held a short position in COIN and put options on COIN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.