It’s here… the highly anticipated Robinhood IPO.
The popular trading platform’s IPO is expected to price tonight and begin trading tomorrow in one of the most awaited deals of the year.
The company that pioneered free trading effectively forcing the brokerage industry to drop commissions in 2019, is now pushing for the little guy again…as the company is expected to sell its users up to 35% of its IPO shares.
This is an unusual move and a first for the industry, which tends to favor the big institutional money.
Interested in the stock or not, this has ramifications for the future of the IPO market…
Pay attention tomorrow when the stock opens for trading on the Nasdaq under the ticker symbol HOOD.
Robinhood (HOOD) IPO
This is not your “average” IPO…
Robinhood (HOOD) plans to sell its users up to 35% of its IPO shares.
Historically companies reserve only 1%–2% of shares for customers…and there’s a reason for that.
Individual traders are unpredictable while institutional investors that buy into an IPO do so as a long term investment…meaning they won’t be dumping shares early on, allegedly.
But the IPO market hasn’t been the same in recent years and…with the influx of direct offerings, reverse mergers, and SPACs…this is just the most recent challenge to the structure of the old school IPO.
And with good reason, afterall, Robinhood (HOOD) is an advocate of the little guy…seeing massive growth by opening the markets to individuals with lower account values, a previously underserved market.
This move stays true to their mission by putting individual traders alongside professionals in the IPO market, and perhaps allowing them to get ahead of any first-day “pop” in the stock price.
Going to the Moon? or Got Concerns?
If you have your reservations, you aren’t alone.
Here’s the rundown…
1. Speculative Trading: Options trading accounts for about 38% of revenue, while crypto is 17% of revenue (34% of the crypto revs were from dogecoin alone).
Making most of its money on transactions, the company benefits majorly from fads and “themes” such as meme stock mania back in January…and more recently the big uptick in crypto trading.
Is doge trading a stable revenue source?…not likely. But so far when one fad fades, another has taken its place.
So I have to ask myself, will there always be a new thing to pull in huge speculative trading volumes? Or is this a real risk?
2. User Growth: Robinhood’s massive growth came from an increase in trading volumes across the brokerage industry, combined with a surge in new customers…
A boom in retail trading has benefited the industry as a whole, but Robinhood (HOOD) helped spur the move with commission free trading and no account minimums.
But again, since most of Robinhood’s revenue is derived from transactional activity there is a risk that a market downturn could derail the train.
Remember the dotcom retail trading boom? No one was trading after the bubble burst.
3. Regulators:
A. Payment for order flow: As the main source of revenues, it’s important to understand how it works, and any issues surrounding it…(check out my write up here).
B. Cryptocurrencies: The SEC, and everyone really, is looking to regulate cryptocurrencies more closely…
With 17% of HOOD’s revenues coming from crypto…it’s just another thing to keep an eye on.
C. Current Issues: In a filing late yesterday, Robinhood said it received a FINRA investigative request seeking documents and information related to its compliance with the agency’s registration requirements for member personnel.
Of specific interest, the “non-registration status” of both CEO Tenev, and co-founder Baiju Bhatt.
It doesn’t stop there though…regulators are also probing the timing of Robinhood employees’ stock trades that occurred at the time the company imposed trading restrictions on certain stocks related to the Reddit meme stock squeeze.
Fun times…
And this isn’t the first run-in with the regulator.
Just last month Robinhood was slapped with FINRA’s largest-ever penalty, totaling about $70 million.
Final Thoughts
When it comes to Robinhood (HOOD), there’s a lot to unpack.
Revenue and growth stability, regulatory concerns vs. massive growth trajectory and plans to continue to innovate, such as differentiating its product line to include retirement accounts…in hopes of transitioning its large trading client base into long term investors.
Whether you side with the concerns or the potential for growth, one thing is for sure…
This is not your average IPO.
And for that reason, it’s something to watch…it could affect the future of the industry.
If it’s a success, will we see more IPO shares given to individuals in the future?
