3 Reasons I Think Cathie Wood Is Buying Robinhood Stock Again

Cathie Wood's ARK Invest went back to Robinhood (NASDAQ:HOOD) this month. The firm bought 28,589 shares of the brokerage for its flagship ARK Innovation ETF on Sept. 4, then added 27,083 more on the first trading day after the Labor Day break.

The purchases mark a reversal. ARK sold Robinhood shares for much of the summer, unloading a big block in July and selling again as recently as Aug. 26. And while the firm discloses its trades daily, those notices don't explain the reasoning, so Wood hasn't said what changed her mind.

The first of the two buys came one day after shares jumped about 17% in a single session. Even after that pop, the stock (about $113 as of this writing) would still have to climb about 36% to get back to its 52-week high of $153.86.

Robinhood published its August operating data on Thursday, two days after the second purchase. Those numbers describe the business ARK was buying, and I think they make the purchases easier to understand.

Here are three reasons I think Wood is buying Robinhood stock again.

Image source: Getty Images.

1. Event contracts now out-earn crypto

Robinhood's event contracts (prediction markets, where customers trade yes-or-no contracts on outcomes like elections and economic data) are scaling faster than anything else the company operates. In the second quarter, event contracts generated $156 million of revenue, up more than 10-fold year over year. That was more than the $100 million Robinhood earned from crypto trading during the period, a line whose revenue fell 38%.

The growth carried into August. Customers traded 4.7 billion event contracts during the month, 15 times the year-ago figure but 23% less than July. July's 6.1 billion was itself down 5% from June.

Sure, volumes have now cooled for two straight months from the June peak. But a product still running at 15 times last year's volume is arguably the kind of new-market growth a fund like ARK exists to own.

2. Assets keep flowing in

The tech company ended August with $384 billion in total platform assets, up 8% from the end of July and 26% year over year. Net deposits added $4 billion during the month and about $74 billion over the trailing 12 months. That deposit figure is money that flowed into accounts, separate from anything the market did. And it kept arriving even when the totals dipped -- total platform assets fell 4% in July, to $355 billion, before the August rebound. Funded customers reached 28.6 million, up about 1.9 million over the past year.

After all, nearly everything else a brokerage earns runs on those assets: trading activity, margin lending, and interest on customer cash. An asset base a quarter larger than it was a year ago gives Robinhood more to monetize no matter which product is popular in a given month.

3. Customers are borrowing more

Margin balances ended August at $21.5 billion, up 4% from July and 72% over the past year. Robinhood's margin book had already more than doubled over the 12 months through June, finishing the second quarter at $21.6 billion, and balances have held near that level since.

In other words, customers aren't just parking money on the platform. They're borrowing against their portfolios to invest more. And that lending earns Robinhood interest in busy markets and quiet ones.

Of course, margin balances can unwind quickly in a market decline, and the interest income tied to them moves with rates. But that kind of deepening engagement is a big part of what makes Robinhood a growth stock rather than an ordinary brokerage.

Would I buy the stock, too?

As for whether I'd join Wood, I view Robinhood stock as a hold today -- not a buy.

The company is executing about as well as a growth investor could ask. However, the stock isn't a clear buy here, in my opinion.

At about 39 times projected earnings for 2027, shares already assume years of strong growth from the same business lines. For investors who already own them, that alone isn't a reason to sell, in my view. If the stock fell meaningfully from here, or if event contracts kept scaling anywhere near their current pace while the share price stood still, I could change my mind.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.