Are Meme Stocks and Short Squeezes Actually Good Business for Robinhood and Its Investors?

Robinhood Markets (NASDAQ: HOOD) has been one of the top stocks of the past year, up more than 400%, as it's ridden the bull market in both stocks and crypto, and a wave of increased trading activity has led to a surge in revenue and profits.

Additionally, the company has innovated with new products like retirement accounts; its Robinhood Gold premium subscription, which offers a wide range of benefits; and new partnerships with prediction markets. The company gained entry into the S&P 500 as well earlier this year, helping to boost the stock.

Image source: Robinhood.

How meme stocks and short squeezes benefit Robinhood

The disruptive brokerage first gained prominence during the pandemic as its platform became the preferred one of millennials and Gen Z, thanks to its no-commission and easy-to-use model.

Robinhood wasn't a publicly traded company when the first meme stock craze happened with GameStop, but it was a clear beneficiary of it early on. In fact, the trading platform was inundated with buy orders and eventually had to halt trading in the stock, eliciting backlash against the company.

However, any spike in trading activity tends to be good for Robinhood. Though it generally doesn't collect money on commissions, it does generate income through payment for order flow, which is believed to be its biggest source of revenue. Payment for order flow means that market makers pay Robinhood to send customer orders to them, as every market order needs a counterparty.

Meme stock rallies and the short squeezes that go with them tend to be concentrated among traders, much like the GameStop surge was, allowing Robinhood to earn income from that trading activity.

Are meme stocks back?

After a lull following the pandemic and the explosive gains from GameStop and AMC Entertainment, meme stocks appear to be making a comeback, which may be another sign of frothiness in the market.

Earlier this year, Opendoor Technologies soared on a viral online argument that it could be the next Carvana, rising from near-bankruptcy as the housing market recovered. Additionally, Beyond Meat more than doubled on Monday on a similar short-squeeze-driven meme rally.

Robinhood's revenue jumped 45% in the second quarter to $989 million, driven by a 65% increase in transaction-based revenue to $539. Equity notional trading volume increased 112% from the quarter a year ago to $517 billion, and platform assets nearly doubled to $279 billion, driven by an increase in net deposits.

Clearly, Robinhood is benefiting from an increase in trading volume, among other things, and the interest in meme stocks and short squeezes is part of that.

Jeremy Bowman has positions in Carvana. The Motley Fool has positions in and recommends Beyond Meat. The Motley Fool has a disclosure policy.