Short selling data can be very useful from a risk management perspective. Short sellers tend to be high-conviction traders. If they’re shorting a stock, there’s usually a good reason they are doing so.

In this report, we are going to analyze the short selling data on Robinhood Markets Inc (HOOD:US). Robinhood is an American company that operates an investment platform. Through its platform, customers can trade stocks, options, crypto, and exchange-traded funds (ETFs). At present, it has over 20 million users. The company is listed on the Nasdaq Global Select Market and currently has a market capitalization of $13.0 billion.

Robinhood Markets Inc: Short Selling Activity

Looking at the short selling data on Robinhood, we see several red flags.

The first is that short interest is extremely high at present. Right now, around 45.5 million HOOD shares are on loan. That represents 78.03% of the free float.

The second is that the number of shares on loan has increased significantly over the last few months. When we last covered the stock, in early September, around 17.9 million shares were on loan. Since then, the figure has risen by more than 150%. This tells us that short sellers are ramping up their short bets.

The third red flag is that utilization is very high at 96.9%. Utilization is effectively a measure of demand on the short side. A reading this high tells us that demand for stock from short sellers is very strong at present.

Risk to the Downside

Robinhood’s share price has fallen significantly over the last three months. It’s not hard to see why.

For a start, third-quarter 2021 results were very disappointing. For the quarter, revenue came in at $365 million, well below the consensus forecast of $431.5 million. The company also reported a slowdown in user growth and crypto trading.

Secondly, a number of analysts have reduced their price targets for the stock recently. Earlier this month, analysts at Piper Sandler reduced their price target to $17 from $38.

Third, there continues to be significant regulatory uncertainty here due to the company’s business model (payment for order flow).

Finally, sentiment towards hyper-growth stocks has deteriorated significantly due to the fact that the Fed has commenced its tapering process, and bond yields have risen.

While the stock has already taken a large hit as a result of these issues, the short selling data here indicates that short sellers see further downside to the stock. The fact that they have increased their short bets significantly in recent months suggests that they are confident that the stock will continue to fall.

Given the sharp rise in short interest here, we think caution is warranted towards the stock at present.

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