Robinhood’s IPO is widely expected by the markets in 2021 given the high popularity of this online broker. The simplicity of the interface, zero commissions and the ability to buy cryptocurrencies can bring Robinhood even more growth, but the company faces a number of risks.
Robinhood Markets Inc. has privately applied for an IPO (initial public offering) with the Securities and Exchange Commission (“SEC”).
According to a Robinhood blog post: “The number of shares to be offered and their estimated price range have yet to be determined. The IPO is expected to take place after the SEC completes the review process, subject to market and other conditions. ”
Robinhood has revolutionized investing. Founded in 2013 by Vlad Shadow and Baiju Bhatt, roommates at Stanford, Robinhood has a mission to “democratize finance for everyone.” By offering a simple interface and buying fractional shares (instead of buying 1 share, you can buy a part by investing any amount) without commissions, Robinhood made a person with any income a “potential investor”.
Robinhood’s lack of commissions forced other big brokers like Fidelity, Charles Schwab and E-Trade to cut commissions to zero to stay competitive.
Market experts believe that Robinhood’s IPO could take place on NASDAQ in the coming quarter, presumably in May. Goldman Sachs (GS) was hired as the underwriter for the IPO Robinhood, according to the NY Post. As for the estimated Robinhood, analysts disagree.
The company was valued at $ 11.7 billion after a $ 460 million round of funding in September 2020, but Robinhood raised another $ 3.4 billion in February 2021. The last round of funding was conducted by Ribbit Capital, which also included ICONIQ, Andreessen Horowitz, Sequoia , Index Ventures and NEA.
Some analysts estimate that Robinhood’s valuation doubled to $ 40 billion in February 2021.
Robinhood stock: the case for
1. Rapid growth
From its founding in 2013 to the end of 2020, the Robinhood platform has attracted 13 million users. In the first two months of 2021, Robinhood’s audience grew by another 6 million users.
2. The growing stock and cryptocurrency market
With the growing stock market and the continuing rise in cryptocurrency prices, the demand for Robinhood’s services will continue to grow as more people want to take advantage of it.
3. Growth of the economy and the ability to pay of Americans
Following the 2020 recession, economists are forecasting a rebound in growth in 2021 and coming years, given widespread adoption of COVID-19 vaccines, deferred consumer demand, and a recovery in affected industries.
US $ 1.9 trillion bailout bill. provides direct payments of $ 1,400 to most Americans. Polls show that many Americans will spend their $ 1400 checks on the stock market and bitcoin.
4. Robinhood users make money and don’t panic
Although the majority of Robinhood users are young, budding investors, their cumulative results suggest that, overall, their behavior is reasonable and they are earning.
UCLA finance professor Ivo Welch looked at the behavior of thousands of Robinhood traders during the bear market in March 2020 and over the past three years.
According to his research, Robinhood traders tend to take smart moves – for example, they kept buying stocks even when the markets fell, tuning in to a new bull market that would follow a downturn.
“They didn’t panic,” Welch wrote. “Given the subsequent rise in the stock market, their timeliness and resilience have contributed to the good returns of their portfolios.”
They have done well in the long run, Welch said. Between 2018 and 2020, users collectively earned solid profits, which suggests that newbies weren’t an easy target for sophisticated pros.
5. Robinhood improves the training of traders on its platform
Another argument against accusations of misleading investors, insufficient information, etc. is Robinhood’s work to educate its users.
In February, Robinhood stated, “We will continue to invest in expanding access to financial literacy to fulfill our mission of democratizing finance for all.”
6. Robinhood, becoming public, will disclose more information about itself
As long as Robinhood is privately held, it is under no obligation to disclose details of its business model, earnings, etc. By becoming public, investors will receive a more “transparent” picture of the functioning of the Robinhood platform, which will be obliged to provide truthful information about itself.
This will fill Robinhood’s missing competitive advantage over other larger online brokers and build more trust in the company and its platform.
7. Funding will allow Robinhood to improve its technical base to prevent disruptions
The funding raised during the IPO will allow Robinhood to improve its technical base to ensure smooth trading, given the large growing user base and high volatility in the markets.
8. Potential for international growth
The Robinhood platform is currently only available to those residing in the US, UK and Australia. If the company manages to enter new markets, it can significantly increase its revenues and profits. For example, the Chinese investment app WeBull is already trying to replicate Robinhood’s approach to investing.
Robinhood stock: arguments against
1. Investigations against Robinhood
In September, the SEC launched an investigation into Robinhood, accusing the company of fraudulent high-frequency trading practices. Marketinfo.pro wrote about this in more detail in the article “Robinhood came under investigation by the SEC with a potential fine of $ 10 million.”
The attention of US regulators may also be directed towards the Robinhood money making model itself. Since the company does not generate income from trading commissions, Robinhood’s main source of income is through order flow fees, where a broker directs clients’ trades to OTC marketplaces for a fee.
This practice is banned in the UK and Europe as it creates a conflict of interest because it is believed that firms have a vested interest in directing customer transactions to the highest paying sites for order flow, rather than ensuring that the customer receives the best available price. market.
So, on July 21, 2020, Robinhood canceled the launch of its investment app in the UK.
2. Lots of online brokers with zero commissions
Gone are the days when Robinhood was a pioneer and the only one to provide trading services with zero commissions for users. There are now at least nine more companies on the market that provide “zero commissions” and many of them are “high-profile” and more reputable firms: Charles Schwab, Fidelity, You Invest by JP Morgan, Interactive Brokers, Merrill Edge, E-Trade, Ally Invest, Vanguard, TradeStation.
3. Highly competitive environment
At the beginning of 2018, Robinhood was one of the first to launch a cryptocurrency service on its platform, users were able to buy bitcoins, ethereum and many other digital currencies in the application in the same way as they buy shares.
However, similar services have also been launched by PayPal (PYPL), Coinbase and Fidelity, which are strong competitors.
4. Precedents of GameStop and Cryptocurrency Trading Restrictions
In January, amid speculation by retail investors, the shares of GameStop (GME) of other companies rose sharply and then also fell sharply. Read more on the GameStop page…
On January 28, Robinhood and Interactive Brokers restrained GameStop’s trading, prompting grievances from many users, lawsuits against these online brokers, and regulatory investigations.
At the same time, Robinhood limited cryptocurrency trading on its platform, explaining this by “unusual market conditions.”
5. Robinhood technical glitches
Last August, Marketinfo.pro wrote that the Robinhood platform had more transactions in a month than all major brokerage firms, and more than E-Trade and Charles Schwab combined.
Such activity is fraught with high risks of disruptions and interruptions in trading, which can harm investors.
6. Risk Interest May Fall When Markets Fall
Throughout its history, the Robinhood company survived only the crisis of 2020, when financial markets fell sharply in February-March due to the coronavirus pandemic, but, nevertheless, most users of its platform only know the bull market.
Experts warn that in the event of a prolonged recession, investor interest in risky assets could sharply decline, which will affect Robinhood’s earnings and profits.
Even with favorable market and economic conditions, Robinhood can find it difficult to justify its high valuation and continue to grow at a high rate.
7. Robinhood users take more risks than they can afford
Robinhood encourages its users to trade more often, while experts point out that intraday trading is the most difficult for newbies.
Berkshire Hathaway Vice President Charlie Munger, 97-year-old partner of Warren Buffett, called Robinhood’s practices “egregious” that encourage the “gambling mindset of racetrack bettors.” “It’s a dirty way to make money,” Munger said.
Retirement Income Strategies financial planner Christian Finfrock said: “Robinhood has opened the door to a future that we need to get used to, but I fear people are investing more than they can afford to lose and it cannot end well.”