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As most of you are probably aware by now, Robinhood, the pioneer of no-commission trading, and the platform many of you may be using as we speak, is planning to take it to the public markets.

An IPO, which may value the company as high as $35B, is expected to price today, on July 28th, and commence trading tomorrow, on Thursday July 29th under the symbol “HOOD”, initially pricing the shares in the $38-$42 range.

Given the amount of hype and publicity this future stock gets, I figured I’d spend some time giving you more details about the company and what its first few days of trading may bring.

 

Growth Story is Remarkable

Robinhood is not considered a “hot” IPO for no reason.

The company’s motto of “democratizing finance” is clearly resonating with the public: the brokerage has gained over 20 million users since its inception in 2013, adding 6 million in the first 2 months of 2021 alone.

Such growth is no accident – as the number of trading accounts grew exponentially, driven by the COVID-19 pandemic and stay-at-home orders, Robinhood may very well have come out the biggest beneficiary of lockdowns.

But perhaps, the biggest question is how does this user growth translate into revenue and, in fact, how does Robinhood generate revenue at all, given its commission-free model?

The brokerage makes its money primarily in 2 ways:

  • Commission from market makers and trading firms who pay for the company’s orderflow – accounts for nearly 75% of last year’s revenue
  • Spreads earned on margin loans and subscription revenue from Robinhood Gold – the company’s premium account offering

Speaking of actual figures, Robinhood brought in $277.5M in 2019, $985M in 2020 and a whopping $522M in Q1 of 2021 alone.

Talk about growth, huh?

 

Robinhood Has the Classic Startup Problem

What’s one thing that unites so many hot startups that have gone public over the past few years?

Very few of them are profitable or anywhere close to generating a return on their incredible revenue figures.

And, in that sense, Robinhood is no exception!

The company did squeak out a $7.4M profit in 2020, which doesn’t sound overly impressive given nearly $1B in revenues for the period.

But hold on, there’s more: in 2019, Robinhood lost $107M. Then, in the first quarter of 2021, the company already recorded a $1.49B charge for “change[s] in fair value of convertible notes and warrant liability” leading to a pretty insane loss of $1.44B for Q1 alone.

 

Company Has Had “Loud” Issues In the Past

Adding to profitability concerns, Robinhood seems to have a pattern of getting itself into bad publicity.

Here’re some of the best known PR issues the company has had in the past:

  • Settlement with FINRA for misleading customers about revenue sources and failing to provide best executions
  • Being in the epicenter of “meme” stocks and the circus that ensued, forcing company’s CEO to testify before the congress
  • Claims that Robinhood promotes risky trading and has inadequate technological oversight and support

None of these alone can make or break an IPO or a company, but bad publicity is something the market cares a lot about, so it’s only fair we keep it in mind.

 

Robinhood Gives 35% of Shares to Clients

In a very unconventional step, Robinhood announced that it will allocate as much as 35% of the offered shares to its clients.

As a point of reference, with “regular” IPOs, it is rare that a company allocates more than 10% or 20% of its shares to retail investors and traders.

The shares will be allocated randomly through the company’s IPO Access – a system that allows clients to obtain stock at IPO listing prices.

Given the speculative nature of Robinhood’s clients (Average account size of $3500 vs $100k-$200k for traditional brokers) and such a large allocation to them, we can surely expect that trading will get bumpy.

 

Bottom Line

Robinhood is undeniably one of the hottest “startup” IPOs in quite a long time.

And, like many of its hot peers, the company has a record of questionable fundamentals and negative press coverage.

I’m not here to make a recommendation about the company’s long-term value, but based on all of the above I’m fairly certain about one thing – trading it will be wild over the first few days and even weeks.

I’m not having any bias and will trade only what I see, but I am considering 2 scenarios that might get me involved:

  • The company’s hype pushes it to open really high up, possibly at $60-70, at which point I’ll be looking for a fade, similarly to what Coinbase (COIN) did following its IPO.
  • The concerns and bad publicity cause it to flop and open or slide right after opening into $30-$35 range. I’ll be looking for a base and a long trade into $40s, as retail investors pile in.

In any case, I’ll be staying safe and small – a stock as unpredictable and with so many retail traders involved is not something you I want to bet a farm on.

Author:
Jason Bond

4 Comments

  1. Really good info and easy to understand.
    Thank you for explaining the ‘why’ and
    ‘how’ of how you make your decisions to buy or wait. I’m learning a lot from you!

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