Company / Analytics

Analytics, 30 July 2021

Robinhood IPO and stock outlook

The much-awaited Robinhood IPO finally happened. Shares of the brokerage app began trading on the Nasdaq on Thursday this week. As expected, Robinhood’s was a historic listing. But instead of moving up, shares fell 8.4% in the first trading season – the worst debut on record among 51 U.S. firms that raised as much cash as Robinhood.

Shares started trading at $38, the low end of its range, valuing the company at roughly $32 billion. After dropping as much as 10% and ending the session at $34.82, Robinhood’s market capitalization was about $29 billion.

Unlike many recent IPOs, Robinhood was profitable last year, and the future appears brighter for the free trading pioneer – if it can hang onto and add more of the new generation of traders behind its growth.

Robinhood listing

Online brokerage firm Robinhood hit the public markets as it seeks to democratize investment for amateur investors. The stock trading app has surged in popularity among retail investors after its free trading forced the brokerage industry to drop commissions on retail trading, lowering the barrier for millions of new investors to access the stock market.

The online brokerage started trading at $38 per share, the low end of its range, valuing the company at roughly $32 billion. After dropping as much as 10% and ending the session at $34.82, Robinhood’s market capitalization was about $29 billion.

According to Bloomberg, for an IPO of Robinhood’s size and larger, that’s the weakest opening trade since Uber Technologies Inc. in May of 2019 among U.S. firms. Uber finished its debut session down 7.6%.

The company sold 52.4 million shares, raising close to $2 billion. Co-founders Vlad Tenev and Baiju Bhatt each sold about $50 million worth of stock. The company was last valued in the private markets in September at $11.7 billion. The deal was led by Goldman Sachs and JPMorgan Chase, both of which as underwriters have an option to buy an additional 5.5 million shares.

Unlike many recent IPOs, Robinhood was profitable last year, generating a net income of $7.45 million on net revenue of $959 million in 2020, versus a loss of $107 million on revenue of $278 million in 2019.

However, it lost $1.4 billion in the first quarter of 2021 tied to emergency fundraising-related losses during January’s GameStop trading mania. The company generated $522 million in revenue in the quarter, up 309% from the $128 million earned a year earlier.

Is Robinhood’s stock price a good deal?

One way to figure out whether that valuation makes sense is to compare it to Charles Schwab, which pioneered cut-rate brokerage services back in the 1970s. Robinhood’s expected market cap comes out to less than $2,000 per active customer, compared with nearly $4,000 per customer for Schwab, with its $127 billion stock valuation. So, on the basis of active accounts, Robinhood’s presumed price tag doesn’t look so heady.

But when you look at the amount those customers hold at Robinhood and Schwab—around $5,000 per account and $237,000, respectively—Robinhood begins to look like it’s on another planet. Right now, the company depends heavily on transactions; the more their customers trade, the more Robinhood makes.

The reason Robinhood does better when customers trade more is that it sells those trading orders to market makers, in what’s known as payment for order flow (PFOF). That business model is being scrutinized by the Securities and Exchange Commission amid concerns that it creates a conflict of interest and that retail traders aren’t getting the best trading execution available.

Robinhood is raising a new generation of traders. The key for Robinhood is whether it can hang onto, and add more of, those younger customers over the years as they become wealthier and obtain more assets. Indeed, Robinhood introduced investing to 18 million youngsters, predominantly Gen Z and Millennials. This generation – Gen Z is expected to (and are already doing so) invest and grow their wealth. And as they do, Robinhood is going to grow with them.

What is the outlook for Robinhood share?

Founded in 2013, Robinhood pioneered free trading, forcing the brokerage industry to drop commissions on retail trading, in the end lowering the barrier for millions of new investors to access the stock market.

The app experienced record levels of new, younger traders entering the stock market during the coronavirus pandemic. That surge has continued into 2021, marked by frenzied trading around so-called meme stocks. The millennial-favored stock trading app found itself in the middle of a firestorm in January amid the short squeeze in GameStop, which was partially fueled by Reddit-driven retail investors.

Robinhood offers equity, cryptocurrency, and options trading, as well as cash management accounts. It had 18 million clients as of March 2021, up from 7.2 million in 2020, an increase of 151%. The company estimates funded accounts reached 22.5 million in the second quarter. Robinhood estimates its 18 million retail clients and more than $80 billion in customer assets in the first quarter ballooned to 22.5 million users and more than $100 billion in the second quarter of 2021.

Meanwhile, assets under custody have jumped to roughly $80 billion from $19.2 billion last March and are expected to top $100 billion in the second quarter. Robinhood is the third-largest brokerage based on the number of funded accounts, behind Fidelity and Charles Schwab, which purchased TD Ameritrade last year. Other competitors include Interactive Brokers and newer services like Webull and SoFi. Charles Schwab has a market capitalization of nearly $130 billion, and Interactive Brokers has a market valuation of about $26 billion.

Despite its rapid growth in the past few years, Robinhood has some future risks. Most notably, the Securities and Exchange Commission is reviewing payment for order flow, or the money brokerage firms receive for directing clients’ trades to market makers. This controversial practice accounted for roughly 80% of Robinhood’s revenue in the first quarter.

The stock trading company collected a record $331 million in payment for order flow in the first quarter of 2021, according to an SEC filing.

Robinhood —which benefits from more speculative trading practices from its clients — also warned of a slowdown in trading revenue and account growth as the retail trading boom simmers. Options trading accounts for about 38% of revenue while equities and crypto are 25% and 17% of revenues, respectively.

The company said it anticipates the growth rate of new clients will be lower in the third quarter of 2021 from the second quarter.

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