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Robinhood is slated to hit markets on Thursday in one of the most anticipated IPOs of the year.
The stock trading app is traded on the Nasdaq under the ticker HOOD and is expected to cost $ 38 to $ 42 per share. Robinhood plans to sell 55 million shares in that range to raise up to $ 2.3 billion.
At the high end of the range, Robinhood would be valued at $ 35 billion, and the co-founders would each own approximately $ 2.8 billion worth of shares. Coinbase, which went public in April, has a fully diluted market cap of $ 65 billion. The apps are among the most popular places for consumers to go to when it comes to cryptocurrencies, with trading soaring in 2021.
Robinhood, whose long-standing mission is to democratize investment, is recognized as the main gateway to markets for young investors.
The free trade pioneer has seen explosive growth in recent years amid a retail boom. The company estimates that its 18 million residential customers and more than $ 80 billion in customer assets grew to 22.5 million users in the first quarter and more than $ 100 billion in the second quarter of 2021.
Robinhood is the third largest broker based on the number of accounts it funds, behind Fidelity and Charles Schwab, who bought TD Ameritrade last year.
Robinhood pursued a largely underserved population in retail investment, which was a significant growth trajectory, according to Autonomous Research analyst Christian Bolu. Based in Menlo Park, California, the app pioneered free trading, forcing the brokerage industry to cut commissions in 2019.
“Robinhood serves that [approximately 84 million] US households with [less than $100,000] in assets that existing retail brokers have largely ignored, “wrote Bolu in a research report.” We appreciate the opportunity for money apps [about $120 billion] in revenue, suggesting Robinhood has a significant growth path. “
While Robinhood successfully acquired clients who were largely left behind by legacy brokers, their account balances are lower compared to their peers, which, according to MKM Partners, should give Robinhood a lower rating.
Robinhood’s IPO price implies a valuation of approximately $ 1,350 per active and funded account based on the estimated 22.5 million accounts in the second quarter of 2021.
This compares to $ 2,500 per account for E-Trade purchased by Morgan Stanley and $ 2,200 per account for each TD Ameritrade account, based on Schwab’s purchase price, according to MKM analysis. Autonomous Research estimates that Schwab accounts are worth more than $ 3,600 per funded account.
An unorthodox IPO
Robinhood’s long-standing mission is to lower the barrier to entry into the financial world, and the IPO was none other than the brand.
The stock trading app reserves 20 to 35% of its IPO shares for its own customers, which according to CEO Vlad Tenev will be one of the largest retail allotments of all time.
IPO shares have historically been reserved for Wall Street institutional investors or high net worth individuals. Retailers typically have no way of buying into newly listed companies until those stocks start trading on an exchange, so they miss the pop.
However, some analysts said Robinhood could expose itself to the whims of the very amateur investors it is trying to help.
“No doubt retailers are much more fickle. The more [Robinhood] The more they are prone to some sort of Reddit super-squeeze activity, “Greg Martin, managing director and co-owner of Rainmaker Securities, told CNBC earlier this month.
Robinhood’s loose lock-up structure is also unconventional. Employees can sell 15% of their shares immediately after going public, compared to the traditional six-month lock-up period. After three months, investors can sell another 15%.
Robinhood even hosted a public virtual roadshow over the weekend, an event traditionally reserved for investment banks and high net worth individuals. The company’s executives invited everyday investors to the call and spoke on topics from a pool of 2,000 questions.
David Erickson, professor of finance at the University of Pennsylvania’s Wharton School, said investment banks typically don’t like novelty in the IPO process. However, Robinhood is such a high profile IPO that it is worth it for the underwriters. Goldman Sachs and JPMorgan are the lead bankers on the deal.
Robinhood is the newest company to change the structure of public offerings. With the increase in direct listings and earmarked acquisition companies, the traditional IPO is quickly a thing of the past.
“I bet some of these institutional investors will especially get away with a significant upgrade from a few months ago, “Erickson said.
Robinhood is likely to be its seventh IPO in 2021, grossing more than $ 2 billion. The previous six are trading below their IPO prices.
Robinhood co-founders Tenev and Baiju Bhatt each plan to sell approximately $ 50 million worth of shares upon initial public offering. Top investors include DST Global, which owns approximately 9% of Robinhood prior to going public. Index Ventures holds approximately 13%, NEA approximately 13% and Ribbit Capital approximately 10% of the pre-IPO ownership.
Trade slowdown and regulatory risks
Robinhood warned in its updated prospectus that the brokerage firm could slow its epic growth as the retail boom cools.
“We assume that our sales for the three months to September 30, 2021 will be lower compared to the three months to June 30, 2021, especially due to the lower trading activity compared to the record levels of trading activity in cryptocurrencies in the three months ended June 30, 2021 and the expected seasonality, ”said Robinhood in an amended prospectus published last week.
Robinhood, which offers stock, cryptocurrency, and options trading, as well as cash management accounts, benefits from the more speculative trading practices of its clients. Options trading accounts for about 38% of sales, while crypto accounts for 17% of sales. Also, trading levels for margin and stock lending were increased in 2021.
“With the lion’s share of Robinhood’s sales coming from transactional activities, there is a risk that a market decline or even lower sales could put pressure on sales,” said Peter Hobson, senior analyst at Third Bridge. “The last time there was similar growth in retail was in early 2000, when retail activity declined significantly after the dot-com bubble burst.”
Robinhood also said it expects the growth rate of new customers to be lower in the third quarter of 2021 compared to the second quarter, “due to the exceptionally strong interest in trading, particularly in cryptocurrencies, that we have in the three months ended June 30, 2021 and seasonality ”. in all trading activities, “the filing states.
“We are unclear whether the new influx of customers at HOOD will continue to be repeat dealers or behave differently from previous user cohorts. Approximately 60% of the accounts funded on Robinhood were opened in the past 12 months, and the vast majority” are of them First time investors, “said Rohit Kulkarni, an analyst at MKM Partners.
Another major risk to Robinhood’s valuation would be regulatory changes to the company’s largest source of income, the flow of payments for orders, or the money brokerage firms they receive for routing client business to market makers. Payment-for-order flow is a controversial practice that has caught the attention of the Financial Industry Regulatory Authority and Main Street.
In the first quarter of 2021, Robinhood found itself in the middle of a firestorm amid an epic short squeeze in GameStop, fueled in part by Reddit-fueled retail investors. At the height of the rise in meme stocks, Robinhood restricted trading in certain securities due to the increased capital requirements of clearing houses. Robinhood raised more than $ 3.4 billion in just a few days to prop up its balance sheet.
“We believe the order payment flow is a better deal for our customers compared to the old commission structure. It allows investors to invest smaller amounts without worrying about commission costs,” said Jason Warnick, CFO of Robinhood am Saturday at the company’s virtual roadshow.
However, Warnick said Robinhood wanted to be fully involved in the regulatory and policy discussion on PFOF. He said Robinhood and the industry could adapt if the model changed.
Wharton’s Erickson described Robinhood as “the most worrying initial public offering since WeWork tried to go public a few years ago.” The competitive office joint venture pulled its IPO in 2019 after investors resisted public figures and disclosures in its prospectus.
Robinhood has provided no indication that investors have lost their appetite for going public. But there are many reasons to be concerned.
In June, Robinhood was beaten with FINRA’s largest single fine to date, totaling approximately $ 70 million. The company also faced lawsuits because of its multi-day outages during times when trading volumes were high during the pandemic. In addition, Tenev had to testify to the House of Representatives Financial Services Committee in February regarding the GameStop trading mania. Tenev’s phone was seized by federal prosecutors during an investigation into restricted stock trading.
Robinhood governance seems “deaf” to these issues, Erickson said.
“Given significant problems with their internal controls and regulators, it would have been thought that their board of directors would be staffed with people with extensive experience in internal securities control and regulation to compensate for this,” said Erickson, former head of Global Stock capital markets at Barclays. “Unfortunately, that is far from the case.”
– with reports from Michael Bloom and Ari Levy of CNBC.