After a difficult launch, could Robinhood’s IPO turn the trading platform into a $35bn firm?
Last night, Robinhood, the US-based online brokerage firm on a mission to ‘democratise finance for all’, had its debut on the Nasdaq stock exchange in New York City.
Despite the highly-anticipated launch, the first foray into stock exchange trading did not go to plan.
The company is currently trading under the ticker HOOD, and the stock price was expected to be priced between $38-$42 per share – giving it a value of around $35bn.
In the first half an hour of trading, more than 49 million shares worth $1.8bn were sold to US investors – but shares in the platform soon fell by up to 12%. Although, they did recover slightly before the end of the day, and shares are currently worth around $36 – 5% down across its first day on the Nasdaq.
Although it did not hit the heights many predicted, it is still America’s most valuable company to have gone public so far this year.
Speaking at the IPO ceremony at the Nasdaq, Robinhood Markets CEO Vladimir Tenev said: “We didn’t build Robinhood for the rich or those with decades of experience. We built it for everyone. We’re humbled to be serving over 22 million people. And yet there’s so much more to do.”
Robinhood took the unusual step of selling 20-35% of its shares though its own trading app – meaning its users and cult-like fanbase could take part in the IPO. Its popularity soared to more then 35 million users during the coronavirus pandemic.
UK investors were unable to participate in the IPO debut, but can now buy shares in the company.
The GameStop controversy
Robinhood is still under the regulatory spotlight following the GameStop craze earlier this year.
Its stock market debut comes just months after it was caught in a heated and controversial confrontation between a new generation of retail investors and Wall Street’s longstanding hedge funds and major investors.
The app received international attention earlier this year (January 28th and after) when it got involved in the GameStop short-squeeze that caused hedge funds billions of dollars in losses. A short squeeze occurs when a stock or asset’s value increases significantly in a short period of time, forcing investors that took short positions to buy back their shares at much higher prices.
Robinhood was criticized for its position to suspend trading on GameStop for a few days which caused a backlash among its user base and beyond. Critics saw the once champion of the small investor siding and defending large wall street hedge funds. Despite this controversy, Robinhood continued its rise in the FinTech world.
The firm became the centre of the controversy after it decided to freeze trades for video game company GameStop. Shares in the firm then soared after traders on Reddit began frantically buying the company’s stock. GameStop shares have since come crashing down only to rapidly rise again.
Robinhood played a critical role, as after the Redditors seized the opportunity to make money at the expense of Wall Street, they then made the decision to restrict buying GameStop – citing issues with volatile stock and regulatory requirements.
As a result, the firm is under investigation by its regulators and lawmakers. Its uers who were a part of the Reddit forum have also expressed outrage at Robinhood’s actions.
Should you be investing in Robinhood?
Maxim Manturov, Head of Investment Research at Freedom Finance Europe spoke to Business Leader about whether UK investors should be looking at getting involved in the company.
Founded in 2013, Robinhood offers commission-free trading through its website and mobile app, while also allowing users to buy and sell cryptocurrencies. The rise of the trading platform has been extraordinary. Between 2013 – 2020 the platform gained 13 million users, averaging a total of one million new users per year. However, in 2021 its user base skyrocketed with an additional 6 million users joining the trading platform in the first two months of the year.
The company’s recent growth in popularity has been down to young retail investors, predominantly millennials, who have taken a liking to the apps slick user and customer experience. It’s popularity isn’t just with young investors; a plethora of companies have also invested in the platform. In February 2021, Robinhood announced that it had raised a further $3.4 billion in an investment round featuring Ribbit Capital, ICONIQ Capital, Andreessen Horowitz, Sequoia, Index Ventures, and NEA.
While Robinhood has expanded rapidly over the last year, it hasn’t come without some public backlash and regulatory scrutiny. Regulators in Massachusetts are looking to ban its citizens from trading on the app, claiming that Robinhood’s gamified investing platform caused its customers to take on too much risk, thereby failing the state’s fiduciary rules.
However, the regulation risks are not that high. As such, Ivo Welch, a professor at the University of California (LA), published an article where he studied the behavior of thousands of traders during the bearish trend in March 2020; he came to a conclusion that Robinhood traders tend to make wise moves. During 2018-2020, investors were seen to earn good profits, which means beginners are not that weak players, after all.
It must be noted that the company is operating in an extremely competitive market. Charles Schwab recently completed a $26 billion acquisition of TD Ameritrade. Morgan Stanley bought E-Trade. And Chinese-owned investing app WeBull is aiming to duplicate Robinhood’s approach to gamified app investing. Further still, its most direct competitors, eToro is also looking to IPO in 2021.
Robinhood created an app with its clients in mind and has a number of top features that make it stand out against its competitors, these include quick signup that requires only five minutes, no minimum number of accounts, ease of use, social touch, crypto trading, 24/7 trading and, last but not least, zero commissions.
This focus on the customer experience has led its user base to grow significantly and weekly app downloads also skyrocketed in the first six months of 2020, which made Robinhood the 4th most downloaded financial app, based on Sensor Tower ranking. That was the first time it made it to the top 10.
Robinhood is also one of the fastest growing fintech start-up companies and is ranked first on CNBC’s Disruptor 50 list this year. Analysts also mention that the retail investors may start getting interested in stock trading very much again, which has not the case since the 1990s.
As the company is changing the entire industry, other large market players have to adapt to the new conditions in order to stay on track and not to lose their clients. Investors get attracted by both new promising techs and the competitive edge that Robinhood currently has, and this is why it is the most anticipated IPO of the week.
What next for Robinhood?
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown spoke to Business Leader ahead of Robinhood’s debut to discuss the future of the business.
There is likely to be huge interest in Robinhood’s IPO, given the swirling speculation about the company on social media forums and the media coverage the company received as it became a central figure in the GameStop craze earlier in the year.
The company was set up to help further democratise investing in the US and draw more ordinary traders into the Wall Street world. If the stock does list within the range of $38 – $42 per share, this will turn out to be a $35 billion dollar idea. But the company has come under the regulatory spotlight and that could have a big impact on the company’s future potential as an investment.
The app has come under fire for the so called ‘gamification’ of investing with the use of rewards and celebratory notifications to encourage users to trade more. Its strategy is paying off with the number of accounts increasing to 18 million by March this year from 7.2 million in March 2020.
The way that Robinhood makes money has also come under intense scrutiny. Instead of charging investors a dealing commission, it puts clients’ trades through certain companies, and in return, these companies pay Robinhood a fee. It’s these charges, called “payment for order flow” that make the company most of its money.
Even though each fee is a tiny fraction of a cent per share traded, it soon adds up. Over the last year Robinhood made $720m from payment for order flow – three quarters of its total revenue. That rose to 81% of revenues in the first 3 months of this year.
But this model is now under review, with the US regulator, the Securities and Exchange Commission (SEC) planning to look again at the stock market trading rules, which could include payment for order flow.
The concern is that it stops investors from getting the best price for their deals and could create a possible conflict of interest between firms like Robinhood and their clients. Firms promise to trade at, or at better than, current market price. But the question remains about whether, under the system, there are even better prices available with other market making companies, which they don’t use. If rules do change this could be a big worry for the firm’s revenues and future investors in the company. It was enough for Robinhood to highlight a potential ban on payment for order flow as a key risk in its prospectus.
This isn’t the first time Robinhood has come under fire from US regulators. In December last year, Massachusetts securities regulator accused Robinhood of gamifying investing. The case included a customer, with no investment experience, who traded 12,700 times in six months. More recently, the Financial Industry Regulatory Authority fined Robinhood a record $70m. It said the company had caused “widespread and significant harm” to investors.
And there could be more storms gathering on the horizon. The Robinhood prospectus named seven US state and federal bodies investigating the company. All this could add up to potential issues down the line, so investors need to take such risks into the equation when they consider investing right from the start of Robinhood’s listed life.
If Robinhood can bat away these issues, or if the SEC decides not to change the current rule book, the groundswell of support among day traders the company has already gathered could potentially accelerate, leading to further growth for the company.
Robinhood vs Buffet: Finding middle ground is crucial for future of investing
Robinhood has criticised Warren Buffet and Charlie Munger’s comments on the ‘casino-like trading’ that such apps encourage – but they have a point. Too many inexperienced investors are rushing in blind, risking their capital without sufficient understanding of that risk. And while some responsibility must certainly lie with the investor, investment apps must take seriously their position as facilitators of uneducated investing and the consequences this can lead to, and implement measures to encourage best practice investing.
Founder of trading platform InvestEngine, Simon Crookall, who previously also founded Gumtree, provides comments on the ways in which investment apps can provide their users with the educational tools to implement a strategic, considered approached to investing.
He said: “Traditionally, investing has been considered an exclusive arena, reserved only for those armed with significant amounts of money or in-depth knowledge of stock markets. Online and app-based investment platforms, with their low costs and ease of access, are helping overcome some of the barriers that deter people from investing.
“However, while increasing access to investing should be applauded, the rise of ‘speculative, casino-like trading’ as Warren Buffet put it, should rightly be given a cautionary red flag.
“There is room for a middle ground, where easy app-based investing combines with a more considered approach to building wealth — helping investors build long-term portfolios that are right for them, rather than being tempted into speculative trading and chasing the latest trends.
“For this to happen, education is crucial. Investing shouldn’t be gambling. Trading apps should be helping to create a new generation of educated investors by encouraging diversification and a calculated approach to risk – a responsibility many apps have failed to fulfil. A diversified, risk-aware, considered approach should be more suitable for most investors.”