Robinhood Stock: Go Long or Short This IPO?

Updated: March 3

It’s now being reported that Robinhood plans to file for an IPO in April seeking a $30 billion-plus valuation. You can read our analysis of this news, or read below for our full breakdown of whether or not you should buy Robinhood stock after it completes its IPO.

Robinhood

IPO Interest

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What is Robinhood?

Robinhood is a financial technology (fintech) company that provides stock, options, and cryptocurrency trading along with banking services. The user-friendly interface and zero-commission trading have made Robinhood popular with younger demographics like Millennials and Gen-Z.

Expected IPO Date:

April 2021

  • The company had been planning for an IPO in early 2021, but recent market volatility has delayed a public offering. It's now reported Robinhood plans to IPO in April.

Bull Case

  • User Growth & Demographics: Robinhood has grown from an idea (trade freely!) to more than 13 million users in the span of seven years, with estimated assets under management exceeding $20 billion. Most of these users are younger than customers of traditional brokerages, giving Robinhood a potential lifetime relationship.
  • Future monetization: Currently Robinhood makes money via order flow and on the spare cash left in accounts. However, the relationship Robinhood has with these young users affords it future revenue opportunities like management fees from ETFs, mutual funds, or even robo-advising services.

Bear Case

  • Operational Risk: Robinhood has faced a series of operational failures in a heavily regulated industry, including a series of high-profile trading outages and security and data breaches.
  • Reputational risk: Robinhood’s once-sterling reputation has been affected by its actions in the GameStop short squeeze saga, particularly the company’s reliance on payment for order flow (PFOF) revenue.
  • Regulatory risk: Robinhood did itself no favors by pausing trading on certain stocks and now finds itself in the crosshairs of Congress and the Securities and Exchange Commission (SEC).

Robinhood News & Analysis

Why Are Investors Wanting Robinhood to IPO in 2021?

Life comes at you fast…

It might seem like eons ago, but Robinhood was considered one of the hottest fintech IPOs as early as January. Its user-friendly interface had become the favorite trading platform for young traders with stock trading chatrooms like Reddit’s ‘Wall Street Bets’ full of Robinhood screenshots trumpeting gains or loss porn.

This was before the company’s role in the GameStop saga. Robinhood has been particularly faulted by both sides in GameStop’s tremendous rise and fall: Wall Street feels like the company’s gamification and zero-cost trading allowed many chatroom traders to act in a coordinated manner to pump up GameStop stock.

Robinhood users are angry it banned buying of GameStop stock (and many others) during a critical juncture, killing momentum and giving hedge funds a crucial advantage over the individual investor.

It’s been the financial story of the year, but lost in the media feeding frenzy is the fact that Robinhood gained users in the middle of all of its issues. According to JMP Securities, the service had more than 600,000 people download the app on one day during the crisis!

In fact, venture capital investors were so sure of Robinhood’s prospects they were willing to cut a $3.4 billion check to help keep the company afloat and to meet capital requirements.

Let’s analyze the bull and bear cases for the Robinhood IPO and weigh out the pros and cons.

or, skip straight to the section on when you can buy Robinhood Stock

Bull Case: Why Would You Want to Buy Robinhood Stock?

Investing is in the midst of a demographic sea change and Robinhood is leading the way. For years investing was mostly a pursuit for financially established – generally, older — Americans with the ability to buy into professional-managed funds while younger and less-affluent Americans – commonly referred to as retail investors — were left with few investment choices.

Robinhood saw a need in the marketplace and filled it with its simple mission to democratize finance for all. It’s succeeding! According to Citadel Securities (we’ll discuss Citadel in more detail later), retail investors accounted for as much as 25% of the stock market’s activity during coronavirus-related trading, up from 15% in 2019 and significantly higher than the 10% Bloomberg Intelligence reports in 2010.

Robinhood has grown from an idea to more than 13 million users in the span of seven years, with estimated assets under management of $20 billion.

However, it’s Robinhood’s target demographics that are the reasons that investors can’t wait to buy Robinhood stock. The company hasn’t released demographics recently, but according to earlier disclosures, approximately 80% — four in five – users are under the age of 35!

Robinhood has a financial relationship with a highly valued target demographic that will be investing for decades to come.

This provides Robinhood optionality for future revenue drivers. Now asset classes like stocks and crypto are top-of-mind for these investors, but likely these users will begin to diversify with products like mutual funds, bonds, and CDs as their net income increases and they become more risk averse.

The lifetime value of Robinhood’s user base is enviable when compared to other financial institutions whose users are older with many spending down and/or transferring assets to their heirs…many of whom are Robinhood users.

Bear Case: What Are the Risks of Buying Robinhood Stock?

Of course, the lifetime value argument of Robinhood’s user base is predicated on one key point: Robinhood keeps its user base. Due to various fumbles from Robinhood, that premise is by no means guaranteed. A recent Fortune survey found nearly 56% of all Robinhood users are now considering leaving the platform.

For a quick list of Robinhood missteps:

  • The company was subject to a $1.25 million fine from FINRA and a class-action lawsuit related to its practice of taking payment for order flow without regard for execution prices for traders.
  • The company faced scrutiny for a system glitch that allowed option traders to take $1 million positions with as little as a $4,000 deposit.
  • The company admitted nearly 2,000 accounts were compromised due to a security breach caused by poor data protection methods.
  • Robinhood CEO Vlad Tenev was grilled in a congressional hearing for his role in the “meme stock” (think GameStop, AMC, etc.) trading frenzy.

Finance is a heavily regulated industry and the fact these issues all happened without the last two years suggests the company might have operational and execution problems.

However, the biggest risk to Robinhood at this point is reputational. The core proposition to democratize finance for all has been called into question by users who were angered to learn that the company sells its order flow to Wall Street hedge funds.

These concerns were amplified when it was revealed Robinhood’s main customer for these orders is Citadel Securities, which had a financial interest in the hedge fund shorting GameStop.

Robinhood’s rash decision to prevent users from buying shares of GameStop indirectly benefited Wall Street hedge funds at the expense of the retail investors and led to allegations, perhaps unfair, it was in cahoots with Citadel. During the high-profile congressional hearing, it was clear Robinhood was considered the villain.

In highly regulated industries like finance, your reputation is currency with both users and regulators alike and Robinhood will have to execute better if it expects to continue to win market share and avoid stifling regulation.

When Can I Buy Robinhood Stock?

During the congressional hearing, Robinhood was asked why a user could not buy shares in the company.

The answer was the SEC limits investment in private companies to only accredited investors: investors need to meet a wealth test of earning at least $200,000 a year ($300,000 for married couples) or investors having a net worth of over a million dollars to own Robinhood stock until it goes public via an IPO or a reverse merger with a SPAC (special purpose acquisition company).

This was expected to happen soon, at least before recent events. Last year Robinhood hired investment banking giant Goldman Sachs to weigh its options to go public and it was reported the company was planning to debut as soon as the first quarter in 2021.

Before then, it’s unlikely retail investors will be able to own Robinhood stock. To date, private investors continue to provide adequate levels of funding including a hastily arranged $3.4 billion raise to address capital limits due to the GameStop frenzy.

The next blockbuster IPO?

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Robinhood Stock: Who Owns It Now?

As a private company, non-accredited investors (outside of employees) can’t directly buy Robinhood stock. Although Robinhood pushes for democratization, the company is under no obligation to disclose its investors or funding rounds.

But there is some publicly available information. Robinhood was founded by Baiju Bhatt and Tenev; the latter remains the company’s CEO. According to Bloomberg, the owners were worth $1 billion apiece as of the May 2018 funding round that valued the company at nearly $6 billion.

Robinhood stock has an enviable list of venture capital backers, including Andreessen Horowitz, Sequoia, and Ribbit Capital, all of which reinvested in the latest emergency round of funding in February 2021.

Finally, Robinhood has a few high-profile owners, most notably rappers Snoop Dogg and Nasir “Nas” Jones. With an enviable list of backers like this, it’s understandable that many retail investors are eager to buy stock once the IPO occurs.

Robinhood Stock Price: How Much is it Now?

Robinhood has gone through eight rounds of funding, including the recent follow-on G-1 round needed to help the company meet capital requirements. We know the valuation will change each time the company undergoes a new investment round, and when the company does go public the stock price will be higher than the current price.

If you look at the chart below that includes cumulative money raised by round and the valuation per round, and you can see the significant market capitalization growth. Robinhood had taken nearly $5.6 billion of outside funding and was valued at nearly $18.1 billion prior to emergency funding rounds it took amidst market volatility.

Reports in March 2021 spilled more details on the terms of Robinhood’s latest capital rounds it took when GameStop mania forced the company to shore up its balance sheet with additional capital. The first capital round Robinhood took during this time will convert at a $30 billion valuation, or at a 30% discount to the IPO value, whichever is less. The second is even worse for Robinhood — a $33 billion valuation or 30% discount to IPO price.

Robinhood Valuation

Data from SharesPost/Author Chart

Robinhood’s share price was reportedly $18.60 as of the last round of funding.

What is Robinhood’s Stock Symbol?

Robinhood doesn’t have a stock symbol yet because it’s not a publicly-traded company. Only publicly traded companies have ticker symbols on stock exchanges, like the New York Stock Exchange (NYSE) or the NASDAQ exchange.

It’s not known right now which exchange Robinhood may list on. Traditionally, financial institutions — like Goldman Sachs and JP Morgan — have listed on the NYSE, while the newer breed of fintech stocks choose to emphasize their tech roots and list on the NASDAQ. PayPal, Affirm Holdings, and Fiserv are all listed on the tech-heavy exchange.

The stock symbol is for branding purposes and to ensure investors remember and can find your company. Assuming a NASDAQ listing, Robinhood has a choice of symbols like RBNH and RHOD to choose from once it goes public. The stock symbol RHM (Robinhood Markets) would seem like a good fit for a NYSE listing.

Robinhood Stock: Should You Buy the IPO?

It’s impossible to answer this question without more information. One thing that’s noteworthy is Robinhood does not appear to be an expensive stock for a fintech company. While we don’t have their audited financial statements, we do have supporting public data we can use to form an initial thesis.

In 2020, it has been reported that Robinhood made approximately $600 million for payments for order flow (PFOF). While this will vary as a percent of total revenue over time, it has been reported that revenue from order flow represents anywhere from 40% to 50% of its total revenue.

Using 45% at the midpoint, Robinhood trades at a price-to-sales ratio of 13.6 times as of the last round of funding at the $18.1 billion valuation.

Robinhood Valuation Table
PFOF Pctg. of Revenue 40% 45% 50%
Total Revenue $1.5 billion $1.33 billion $1.2 billion
P/S Ratio (ttm) 12.1 times 13.6 times 15.1 times

While traditionally 13.6 times revenue has been considered an expensive valuation, for high-flying fintech stocks this isn’t alarming. As a brief comparison, fintech payment stocks like PayPal Holdings and Affirm Holdings trade for 17 times and 69 times trailing sales, respectively.

Admittedly, this is only one metric and investors need a fuller picture. Here’s what we do know: First, Robinhood’s primary method of monetization is now under attack from users and regulators and increasingly competitors have copied its free trading model.

In addition, with Robinhood having taken terms in its latest round of funding that become onerous if its valuation at IPO is less than $30 billion, it’s likely the company will seek that amount at a minimum.

No longer does Robinhood have a unique offering and now its free trade value proposition has been downgraded from a key set-apart to simply a first-mover advantage.

Second, the company’s operational issues appear to be increasing in scope which increases the probability users will abandon the site. There’s nothing highly proprietary about providing trading access to the stock market and, thus, user lock-in effects are low. Even its slick user interface and gamification features can soon be copied by other brokerages that currently have more financial products and education.

A bet on Robinhood’s IPO is a bet that CEO Vlad Tenev can quickly improve the company’s operational issues, which is by no means guaranteed. Robinhood stock appears to be one to put on your watch list until the CEO shows progress on improving its operational execution.

Frequently Asked Questions

Is Robinhood Stock Public?

As of February 2021, Robinhood stock is NOT public. However, the company has been in negotiations with Goldman Sachs and is aiming for an IPO in 2021. The most recent reports are that Robinhood will IPO as soon as April 2021.

What is the price of Robinhood Stock?

Robinhood is currently private, however, as of the last round of funding, it was reported Robinhood stock traded at $18.60 per share. When Robinhood IPOs they will likely seek a valuation of at least $30 billion.

How do I buy pre-IPO stock of Robinhood?

At this point, non-accredited investors are unable to buy stock in Robinhood. Once it IPOs — expected in April 2021 — its stock will be widely available to individual investors.

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