In an ironic twist, Robinhood (NASDAQ: HOOD), which went public in late July, has become part of the ‘meme stock’ craze it helped create. This month, retail investors have piled into the stock, pushing its share price from $35 to $54 – a rise of 54%.
Personally, I don’t see much appeal in Robinhood stock at the moment. In my view, the stock’s risk/reward profile isn’t favourable. Having said that, there’s one meme stock I’d consider investing in right now.
Robinhood stock: the risks
Looking at the investment case for Robinhood, I see several big risks. The first is the company’s business model. Robinhood generates the bulk of its revenues (81% in Q1) from selling customer orders to institutions. This is called ‘payment for order flow’.
The issue here is that regulators don’t like this model. Currently, the US Securities and Exchange Commission (SEC) is in the process of reviewing it. If the SEC was to ban payment for order flow, it would impact Robinhood significantly.
A second issue is that growth could slow significantly. Last year, conditions were very favourable for the online broker. People were stuck at home in lockdown, casinos were closed, and sports events were cancelled (no sports betting). This led to huge growth. As the world reopens and people go back to their jobs, they’re likely to spend less time on the trading app.
Finally, there’s the valuation. When Robinhood came to the market in late July, many people thought the valuation was expensive (the trailing price-to-sales ratio was about 30). Today, the valuation is over 40% higher. If growth does stall, the stock could fall significantly.
Of course, there are some reasons to like Robinhood. The company does have a strong brand. It also has over 20m accounts, an impressive achievement.
Overall, however, I don’t see the risk/reward proposition as attractive.
The meme stock I’d buy
But one meme stock that does look interesting to me right now is semiconductor group Advanced Micro Devices (NASDAQ: AMD). It’s received a lot of attention on Reddit’s WallStreetBets forum recently.
I can see several reasons to like AMD. Firstly, the company – which develops high-performance computing products – has a huge amount of momentum at present. Just look at the company’s second-quarter 2021 results. For the period, revenue was up 99% to $3.9bn while earnings per share leapt 346% to $0.58.
“We are growing significantly faster than the market with strong demand across all of our businesses,” said CEO Lisa Su.
Secondly, the company looks set to benefit from the growth of a number of industries. Not only is it likely to gain from the growth of video gaming but is also likely to benefit from the growth of the data centre/cloud computing.
Third, the valuation doesn’t seem unreasonable. Analysts expect the group to generate earnings of $2.83 per share next year. That puts the stock on a forward-looking P/E ratio of about 37.
Of course, there are risks associated with this meme stock too. AMD operates in a very competitive industry and is up against the likes of Intel and Nvidia. These companies could steal market share. The company also operates in a cyclical industry.
However, I’m comfortable with the risks. I like the long-term growth story here.
