Robinhood IPO: Is Robinhood a good stock to buy?

Robinhood has just had its long-awaited IPO. But is it a good potential investment? We take a look

                                                                 

Contents

• In the news
• What does Robinhood say?
• Valuation and PFOF concerns
• Alleged over-reliance on crypto trading
• FAQs

Robinhood’s long-awaited multi-billion dollar initial public offering (IPO) happened on 29 July, but is it a good opportunity for investors?

Robinhood was set up to bring share ownership to what the company calls “everyday people”. Its features include fractional share ownership. This means that instead of a buyer having to find nearly $4,000 to buy just one share of Amazon.com’s stock, for example, they can purchase half a share for $2,000 or even one-tenth of a share, for $400 via the Robinhood platform.

In recent years, Robinhood has cultivated a reputation for being the go-to destination for millennials looking to gain exposure to the stock market. The company promised that shares could be purchased without commission, a move in stark contrast to old-style investment platforms that often charge high fees for facilitating access to the world of equities.

In the news

The site hit the headlines when the r/WallStreetBets (WSB) Reddit group took on hedge funds that were short-selling the likes of GameStop, Nokia and AMC Entertainment. In GameStop’s case, they managed to send prices rocketing from $17.25 to $483 in less than a month. But all of this created huge financial headaches for Robinhood, forcing it ultimately to restrict the purchase of GameStop stock.

Traders and politicians cried foul over the move, and it led WSB to add Robinhood to a blacklist and encourage its members to use rival platforms. Meanwhile, the company set about trying to limit the damage by raising $3.4bn for two urgent cash injections so that it could meet clearing house requirements.

The WSB affair helped bring Robinhood into the public consciousness, and with this higher profile it was perhaps inevitable that the company would look into going public. While this had been rumoured and speculated upon in the past, it had never quite materialised. That all changed on 1 July 2021, however, when the company announced it would be going public through an initial public offering. The Robinhood IPO date was set for 29 July, and was preceded by an online roadshow for potential investors on 24 July. The top investment bank Goldman Sachs is working with Robinhood on its IPO, suggesting it will be professionally run.

Robinhood IPO news, while not unexpected, generated much interest, especially among people who had become involved in trading on the platform because of the buzz around r/WallStreetBets. According to the company’s filing with the Securities Exchange Commission (SEC), the Robinhood stock price is expected to be somewhere between $38 and $42, and the platform thinks it can raise up to $2.3bn through the sale of 55 million shares. fact that the Robinhood IPO has generated interest is not necessarily a good thing for potential investors, however.

The last time Robinhood was valued privately, it was rated as being worth $11.7bn, substantially less than the reported IPO value of up to $35bn.

And when it finally hit the markets, the share price stood at $38, at the absolute bottom range of the expected stock price. 

This was cause for concern as it was, but during the day things got worse, and it closed its very first day on the stock exchange at $34.82, a loss of 8%. To put it into context, CNN reports that the average first day result for a business which has just been listed is a rise of 33%. Around a quarter of IPOs see their shares drop on their first day of public availability. 

In a statement on its website, Robinhood said: "Thank you to our customers who remind us that Participation is Power and inspire us to be bold, take risks, and constantly reimagine what our financial system can be. We are so grateful to have you on this journey with us."

What does Robinhood say?

There does appear to be an atmosphere of caution surrounding the Robinhood IPO. In fact, Robinhood pretty much admits this in its regulatory filing, where it says “high levels of initial interest in our stock at the time of this offering may result in an unsustainable trading price, in which case the price of our Class A common stock may decline over time. In addition, if the public price of our Class A common stock is above the level that investors determine is reasonable for our Class A common stock, some investors may attempt to short our Class A common stock after trading begins, which would create additional downward pressure on the trading price of our Class A common stock.”

The company also expresses doubts about its ability to manage future growth, saying: ”We have grown rapidly in recent years and we have limited operating experience at our current scale of operations; if we are unable to manage our growth effectively, our financial performance may suffer and our brand and company culture may be harmed.”

Currency.com has contacted Robinhood on two different phone numbers and sent them an email for comment about these matters but has not received a response to date.

Valuation and PFOF concerns

Analysts have also expressed their concerns over the company’s potential Nasdaq performance. Forbes contributor David Trainer said that the company’s estimated value of around $35bn was too high and should be more like $9bn. The argument is that Robinhood might face increased regulatory attention. Rather than take commission for sales, the platform uses something called Payment for Order Flow (PFOF). This method sees a broker, in this case Robinhood, receive a payment when it sends an order to a particular market maker.

PFOF is banned in some countries, including the United Kingdom, but not the United States. As reported in the Financial Times on 9 June, Gary Gensler, chairman of the US Securities and Exchange Commission (SEC) suggested that the SEC could soon be reviewing the system, leading some observers to believe that there was a possibility that PFOF could be banned. If that happened, it would be bad news for Robinhood, which made 81% of its revenue for the first quarter of 2021 through the system. Indeed, Forbes analyst David Trainer said that the situation around PFOF hinders Robinhood’s expansion outside of the United States, which could, in turn, cause the company’s value to go down.

Alleged over-reliance on crypto trading

Analyst Anuradha Garg, writing in Market Realist, argued that there were also issues with the source of Robinhood’s trading revenue. Garg said that the amount of money being traded on the platform for dogecoin, coupled with the company’s high valuation, means that investors should avoid investing in Robinhood for now.

In conclusion, there appear to be risks concerning purchasing stock in Robinhood. There is speculation over its future trading model and how well it can scale up. These things are not set in stone, however, and the markets will make their decisions when we see what happens after Robinhood makes its debut on Nasdaq.

FAQs