Key Insights
- Robinhood stock price is hovering near its all-time high.
- The stock formed a double-top pattern on the daily chart.
- There are lingering concerns about its valuation concerns.
Robinhood stock price has done well this year as it jumped by over 280% from its January levels. This surge has made it the best-performing company in the S&P 500 Index. This article explores why the HOOD stock has jumped and the reasons to sell it ahead of earnings.
Why Robinhood Stock Price Has Surged This Year
There are at least three main reasons why the HOOD stock price has gone parabolic this year. First, the rally is because the company’s recent inclusion in the blue-chip S&P 500 Index, which tracks the biggest companies in the United States.
Companies always jump after this inclusion because it forces exchange-traded funds (ETF) and mutual funds tracking it to buy. It is also a source of prestige for companies to be included in that index.
Second, Robinhood stock price jumped because of its strong financial results that were much better than expected.
The results showed that the company’s revenue rose by 45% in the second quarter to $989 million. Most of this revenue was from its transaction business, especially options trading.
Robinhood also benefited from the elevated interest rates, which pushed its net interest income up by 25% to $357 million.
The company’s crypto business also performed well, with revenue increasing by 98% to $160 million. This was notable as Coinbase’s revenue declined during the quarter.
Third, the HOOD share price has jumped as investors cheered its entry into the booming tokenization industry. Its tokenized stocks have made it possible to offer over 500 stocks and ETFs to its European clients. It did that using Arbitrum’s technology and is now working on its own layer-2 network.
HOOD Stock May Fall Because of Its Valuation Concerns
There is a likelihood that the Robinhood share price will drop after the company reports its earnings on Tuesday this week.
One of the primary reasons for this is that the company has become highly overvalued due to its strong revenue growth and market share gains.
Data shows that Robinhood has a forward PE ratio of 82, much higher than the S&P 500 Index average of 23. Its forward non-GAAP PE ratio of 70 is also much higher than other companies.
According to SeekingAlpha, the financial and technology sector median PE multiples are about 11 and 30, meaning that it is clearly overvalued.
A major limitation of the PE ratio is that it does not include a company’s growth. As such, the better multiple to use is the PEG ratio, which is also higher than this industry average. Its forward PEG ratio is 3.35, much higher than the sector median of 1.12.
Therefore, these numbers mean that Robinhood is priced to perfection and a minor sign of slow growth will affect its stock price.
Robinhood Share Price Has Formed a Risky Chart Pattern
The other main reason why the Robinhood stock price may crash after earnings is that it has formed a risky chart pattern on the daily chart.
This chart shows that it initially peaked at a record high of $154 in October and then pulled back to a low of $120 as the stock market crashed.
A closer look reveals that the stock is in the process of forming a risky double-top pattern, with its upper side at $154 and the neckline at $120.
The price target in a double-top pattern is estimated by first measuring the distance between the upper part and the neckline. In this case, this distance was about 20%.
Measuring the same distance from the neckline gives it a target at $95.58. This is an important level, as it coincided with the lowest levels in August and September this year.
On the other hand, a move above the upper side of the double top at $154 will invalidate the bearish HOOD stock price forecast and point to further gains, potentially reaching $160.
The post Top Reasons to Sell Robinhood Stock Ahead of Earnings appeared first on The Market Periodical.
