Robinhood, an online brokerage previously known in the U.S. and now beyond, held an IPO. The company raised $1.9 billion with a valuation of $32 billion. The stock trades under the ticker symbol HOOD, and you can buy tokenized shares of Robinhood at Currency.com.
Robinhood is a well-known company that few people don’t know about, at least from the financial community. As such, its IPO has become one of the most anticipated events in the financial sector in 2021. In this article, Currency.com experts tell us what you need to know about the IPO, as well as the pros and cons of the company.
About the broker
Robinhood is a trading application developed in 2013. The creators of the site Vlad Tenev and Baiju Bhatt. The broker chose the format of the application, because initially he was determined to attract young people, which paid off. In Robinhood, Vlad and Baiju were able to combine what others before them could not do – simplicity and cheapness. A unique feature of the broker is that traders don’t pay any trading commissions, they are completely absent.
Robinhood provides the client with the following trading instruments for trading: options, stocks, cryptocurrencies, currencies and others. Initially, the broker has focused its attention on the young population – and due to the ease of use of the app, as well as the absence of trading commissions, it has managed to attract young people. It turned out that the average age of the user is 31 years, what no other similar site can boast.
The lack of trading commissions is good for Robinhood users, but not for investors. As a rule, a broker gets the main profit from trading commissions, but since it doesn’t have them, investors may ask – where does Robinhood get its profit? Its main source is the sale of paid subscriptions, which cost $5 per month. It’s a small amount, but it’s the number of customers, not the cost of subscriptions, that counts. As of March 2021, about 1.4 million users of the platform are paid subscribers. For $5, a client gets access to a wealth of market data, daily and weekly analytics from MorningStar, and instant deposit, which is in no way dependent on the speed of transaction processing by the bank.
If you are starting your way in investing, you will find useful information in “Trading education” section on Currency.com crypto-platform, which will help you in making decisions – how trading tools work, how to form a trading strategy and, most importantly, what stocks to buy. You can also create a demo account and practice with it.
A company that is about to go IPO must have a good profit, or its shares won’t be in demand. Robinhood was no exception: the first quarter of 2021 ended with an increase in profits from $128 million to $522 million. You’d think that would be an excellent indicator – buy the brokerage stock and hold, but no: along with profits, losses increased – by $1.4 billion, which was an absolute anti-record for the site.
Users of the network suggested that such a number of losses associated with the shares of GME. In January 2021, the users of the Reddit forum decided to go against various hedge funds and those who want to bring GameStop to bankruptcy, and, as a result, they vaporized its stock. A wave of liquidations swept the market, and Robinhood’s clients were among them.
Soon the official representative of the broker stated that convertible debentures were to blame. When convertible bills were issued, the value of the shares that were pledged increased, as their price was higher than the sum borrowed. So Robinhood incurred nominal losses which had nothing to do with the quality of the business or the market situation.
The IPO – what’s wrong with that?
And what’s wrong is that many people don’t like the business model chosen by the broker – the practice of selling order flow. OK, if those “many” included regular users, then Robinhood would be a less profitable project, that’s all. However, that number includes government regulators, including the SEC and Congress. The financial market knows one thing about the SEC: if a regulator has taken on a project or a company, they will do everything they can to prove that they are right and stop the activity they do not like.
Despite the risks, Robinhood’s plan was to get a valuation of $35 billion, and the price per share would range from $38 to $42. This is the valuation the company gave based on the last financing round, where it was valued at $30 billion.
To buy or not to buy
In fact, Robinhood’s IPO didn’t go so well. The offering was held at the lower price range of $38 per share, the capitalization at the time of the placement was $32 billion. True, the value of the shares on the first day of trading lost 12%, slightly recouping the fall by the end of the day. Experts assert that in this case the IPO Robinhood may become one of the most disastrous among comparable size companies.
Considering the above information, the following conclusion can be made: investing in Robinhood is not a bad gamble, but certainly not a great investment. If you compare the broker to Coinbase, which held an IPO earlier, it was doing much better before its public offering. Aggravating factors for Robinhood’s further favorable development are a controversial business model and litigation with state regulators. At present it is impossible to say for sure whether Robinhood will be able to overcome these difficulties, so it is not worth considering this option as a solid investment.
Investors interviewed by the U.S. media also say that serious investments in the company might not be worthwhile. They say that the company is highly overvalued and its real value is three times lower. Besides, it won’t be possible to restrain such growth in the future: Americans won’t receive more free money as in 2020, which means that Robinhood’s indicators won’t grow so rapidly in 2021. Bloomberg writes that litigation with state regulators can become a real problem, and HYIPing on stocks is a futile story.