Robinhood will begin offering its stock on Wall Street Thursday, the very place the online brokerage has rattled with its stated goal of democratizing finance.
Through its app, Robinhood has introduced millions to investing and reshaped the brokerage industry, all while racking up a long list of controversies in less than eight years.
Robinhood Markets and three of its executives are selling up to 60.5 million shares of its stock in an initial public offering, with trading expected to begin on the Nasdaq under the ticker symbol “HOOD.”
TODAY: Robinhood is going public in an unusual IPO https://t.co/lz9We5QVN5
— Bloomberg Technology (@technology) July 29, 2021
It was priced late Wednesday at $38 a share, the low end of its expected range of $38 to $42, indicating tepid investor interest.
Still, it’s a huge moment for the fast-growing company based in Menlo Park, California, which is reserving many of the shares for its own customers, rather than just big professional investors. Can Robinhood convince them to embrace its stock, just as it helped a generation of investors take on trading stocks, options and cryptocurrencies?
Here are a few things to keep in mind ahead of what’s one of the most anticipated IPOs on Wall Street this year:
HOW DOES A FREE SERVICE MAKE MONEY?
Robinhood’s revenue soared 245% last year to $959 million. It then hit $522 million in the first three months of 2021 alone, more than quadrupling from the year-ago level.
Robinhood doesn’t charge trading commissions or require customers to carry big balances – one reason why it’s so popular. It makes the bulk of its money – 81% of revenue in the first quarter- by funneling investors’ orders to big trading firms, such as Citadel Securities, which take the other side of the trade. They also give a payment to Robinhood.
The practice, called “payment for order flow,” has drawn criticism from lawmakers and regulators. The head of the Securities and Exchange Commission has questioned whether it prevents investors from getting the best price possible for their trades and whether it impels brokerages to encourage customers to trade more frequently than they should.
But legal experts say tighter regulation may be difficult to bring about. Brokerages need to make money somehow, and if Robinhood can’t get it from payment for order flow, it could go back to charging trading commissions, said Joshua Mitts, a law professor at Columbia University. That could make politicians even less popular than they already are.
“I think investors in many ways are pricing that in,” Mitts said, “and there’s a pretty good sense that Robinhood is going to be OK.”
WHAT IF THE TRADING BOOM FIZZLES?
Even if payment for order flow sticks around, Robinhood’s dependence on the practice could be an issue. During normal times, Robinhood may get about 75% of its money from transaction-based revenue, roughly triple what some competitors get, said Tom Mason, senior research analyst at S&P Global Market Intelligence.
Robinhood earns an average of 2.5 cents for every $100 traded. That it means it stands to lose if users start trading a lot fewer $100 blocks on its app.
Robinhood says its revenue could fall in the July-September quarter when compared to the April-June period, when revenue rose an estimated 124% to 135%. Besides seasonality issues, Robinhood said it expects to see decreased levels of trading activity, particularly in cryptocurrencies, which accounted for 17% of revenue in the first three months of the year. Prices of Bitcoin and other cryptocurrencies have been generally falling since peaking in April.
Among other risks, Robinhood’s customers could spend less time on the app if a fading pandemic means they can go on with their lives and do other things with money.
Robinhood also hasn’t always kept customers happy: Its platform has had some high-profile outages, and early this year it temporarily barred investors from making trades in GameStop, when manic movements in its stock were the talk of the market. That may have played a role in the roughly 600,000 customers that emptied their accounts during the first three months of the year. The company has 18 million funded accounts.
Counterbalancing all that may be the strong brand Robinhood has created, which has allowed the company to attract new customers without spending much on marketing. And Robinhood’s advantage over competitors is an intense focus on customers, which pushes it to roll out in-demand products very quickly, said S&P’s Mason.
TRUSTING CUSTOMERS AS INVESTORS
Robinhood is taking the unusual step of allowing users of its trading app to buy up to 35% of its IPO shares before they begin trading. That’s the largest portion by far of pre-IPO shares to be designated for retail investors in an underwritten offering, says Matt Kennedy, senior IPO market strategist at Renaissance Capital.
Typically, only institutional investors and company insiders can buy shares in companies before they go public, and ordinary investors miss out on any first day pop. Between 2001 and 2020 the average U.S. IPO returned 14.5% from the offer price on day one, according to Renaissance Capital. The return this year is an even-better 25% when looking at IPOs that raise at least $100 million.
The biggest risk, Kennedy says, is that retail investors are more likely than institutional traders to flip their shares for a quick profit, raising the possibility of increased volatility on the first day of trading. For its part, Robinhood has warned that users who sell IPO shares within 30 days of the IPO will be restricted from buying shares in IPOs on Robinhood‘s platform for 60 days.
Robinhood stock makes Nasdaq debut in IPO: Here’s everything to know about HOOD
Robinhood Markets, the zero-fee stock trading platform, has shuffled in and out of public favor in the last year: first as a weapon of revolution for an army of retail investors waging war on Wall Street, and then as a banner of doomed causes that marched the army straight into their graves.
Despite its speckled history, it promises to be one of the biggest and most hyped market debuts of the year, set to kick off trading in a matter of hours. Here’s what to know:
Robinhood will debut on the Nasdaq under the ticker HOOD. Shares are priced at $38, the bottom end of its $38 to $42 range, Financial Times reports, and the company is aiming for a valuation of about $32 billion. It’s going public through a traditional initial public offering (IPO) route, as opposed to the direct listings and special purpose acquisition company (SPAC) deals that have been in vogue lately.
In keeping with its stated mission of democratizing the stock market by lowering the barriers to trading, Robinhood is reserving 20% to 35% of its shares for its own customer base, which CEO Vlad Tenev has said would be among the largest retail investor allocations ever. Historically, IPO shares have been primarily reserved for Wall Street institutions and high-net-worth individuals, who can then buy into the stock before its debut, thus capitalizing on any resulting IPO pop.
It’s a highly unusual move, but nevertheless in character for the company. However, some are skeptical of the strategy: “There’s no doubt that retail traders are much more fickle. The more [Robinhood] sells to retail, the more susceptible they will be to some sort of Reddit super squeeze type of activity,” Greg Martin, a director at investment broker Rainmaker Securities, told CNBC recently. In fact, Robinhood itself warned in its IPO registration that its stock price could become a rollercoaster ride.
WHAT ELSE ARE PEOPLE SAYING?
According to a report from The Wall Street Journal, despite the unprecedented access, many individual investors are still passing on Robinhood stock. Chatter on social media platforms like Reddit, Twitter, and Discord suggests that some of the stock’s avoidance might be motivated by revenge, for when the company blocked investors from buying meme stocks like GameStop and AMC amid a frenzied rally earlier this year.
Others say they’ve developed an allergy to the stock after several high-profile controversies, including scrutiny from the Financial Industry Regulatory Authority (FINRA) that led to a $70 million fine for alleged regulatory failings, the costliest penalty ever imposed by the group.
However, another crowd is optimistic, citing Robinhood’s potential to carve out space in the nascent cryptocurrency trading universe.
Robinhood Is Targeting a $35 Billion IPO. Should You Buy the Stock?
Millions of people started trading stocks through Robinhood Markets Inc. during the pandemic. Now those individual investors are getting the opportunity to add shares of the actual company to their portfolio.
The firm that’s enticed hordes to its free app is due to begin trading on the Nasdaq under the ticker HOOD on Thursday, after an initial public offering that’s expected to raise about $2 billion. In an unusual move, the company is reserving as much as 35% of the shares it’s offering for traders using its own app. Normally, those people would have to wait until the stock debuted on an exchange to buy in.
The current target range for shares is $38 to $42, with a total valuation of $35 billion, filings with the Securities and Exchange Commission show. Bloomberg Intelligence analysts estimate the valuation could end up being anywhere from $27 billion to $40 billion, due to massive uncertainty about the company’s future. As the world emerges from the pandemic, it could be more difficult for Robinhood to sign up more customers as they return to their normal busy schedules.
In a live-streamed presentation on Saturday, the firm’s leadership tried to assure potential investors that it still had room to grow, adding that it’s open to the idea of offering retirement accounts like IRAs and Roth IRAs.
How is the company doing?
Robinhood was founded back in 2013 but only became a household name during the coronavirus pandemic, as people stuck at home turned to stock trading for entertainment and moneymaking. With its colorful streamlined app, customers can trade stocks — or fractions of stocks — and cryptocurrencies for as little as $1. That’s lured in young people, especially, who can’t afford whole shares of expensively priced companies like Tesla Inc. with a stock price of more than $600.
In a July filing, the company revealed that it had recorded a net income of $7.45 million on net revenue of $959 million in 2020, a jump from the loss of $107 million on $278 million in 2019. And that was before the height of the meme stock craze.
Earlier this year, Robinhood gained notoriety — and blowback — when it abruptly blocked customers from buying GameStop Corp. and other so-called meme stocks during a run-up in share prices. The company eventually said it had faced a demand for more collateral from its clearinghouse, but an initial vague statement about “helping our customers navigate this uncertainty” helped fuel theories that it was protecting major Wall Street interests over those of the little guys. Some traders swore off the app, but data showed downloads of its app skyrocketed.
The main way Robinhood makes money is through payment for order flow, in which it sends customers’ trades to financial firms that execute the orders and pay Robinhood for the opportunity to do so. Its revenue through payment for order flow increased more than threefold in the first quarter amid the craze, reaching about $331 million compared with $91 million the year prior. Its monthly active users have more than doubled in the past year, reaching 17.7 million in the first quarter, up from 8.6 million in 2020.
Robinhood has been under regulatory scrutiny that has only intensified after the GameStop frenzy, with lawmakers concerned that the app is “gamifying” trading and misleading its unsuspecting retail traders.
The Financial Industry Regulatory Authority fined Robinhood a record $70 million last month for misleading customers and approving risky options trades, among other infractions. The company, without admitting fault, said it had made improvements to its operations.
What’s the case for buying?
If you believe in the free trading revolution. Robinhood introduced millions to the world of investing, making it easier than ever for regular people to bet on companies. Retail investors now make up more than 20% of equity trading, according to Bloomberg Intelligence’s Larry Tabb. With major stock indexes repeatedly hitting all-time highs, people who have never traded stocks before are opening brokerage accounts every day.
“For the last 10 years, what we’ve seen is disintermediation: You’re removing the middle man from the transaction,” said Chris Grisanti, chief equity strategist at MAI Capital Management. “Zillow replaces a real estate agent or Netflix replaces going to the movies. Here you have a trend for that regarding the stock market.”
If you want to get in early. Robinhood is reserving as much as 35% of its shares — up to $770 million — during its IPO for traders using its own app. Usually, access to buying shares at the IPO price is largely restricted to hedge funds and professional asset managers. Anyone else often needs to wait until the shares start trading on an exchange. That means most retail traders can’t benefit from the first-day pops that IPOs are known for. The average first-day price increase for such debuts was 18.4% in the past 40 years, according to Jay Ritter, a University of Florida professor who studies IPOs. But they are risky. Some shares fall by double digits on the first day.
If you expect meme stocks to make a comeback. When meme stocks exploded in popularity earlier this year, the trading platform reaped the benefits of millions making quick transactions. Although meme stocks have since faced a losing streak, Reddit boards and Twitter feeds are still aflame with talk of the next big pop. Plus, those who invested in GameStop or AMC are still sitting on triple-digit gains this year. “The bull case is that it’s growing rapidly, it has the first mover advantage when it comes to kids wanting to use it on their phones, it has the right demographic,” said Dave Ellison, portfolio manager of Hennessy Large Cap Financial Fund.
If you like name recognition. Wall Street heavyweights Goldman Sachs Group Inc. and JPMorgan Chase & Co. are leading Robinhood’s offering, and top shareholders include the venture firms DST Global, Index Ventures, New Enterprise Associates and Ribbit Capital. In addition, Salesforce Ventures — the investment arm of Salesforce.com Inc. — is interested in buying as much as $150 million of Robinhood shares at the IPO price, according to a regulatory filing. The company’s cofounders, Vlad Tenev and Baiju Bhatt, also own big stakes in the firm, worth about $2.5 billion and $2.8 billion, respectively.
Robinhood Markets, Inc.
is an American financial services company headquartered in Menlo Park, California, known for offering commission-free trades of stocks and exchange-traded funds via a mobile app introduced in March 2015.
Robinhood is a FINRA-regulated broker-dealer, registered with the U.S. Securities and Exchange Commission, and is a member of the Securities Investor Protection Corporation. The company’s revenue comes from three main sources: interest earned on customers’ cash balances, selling order information to high-frequency traders (a practice for which the SEC opened an investigation into the company in September 2020) and margin lending. As of 2021, Robinhood has 31 million users.