One of the most highly anticipated initial public offerings (IPOs) to hit the market this year will no doubt be Robinhood Markets (NASDAQ: HOOD), one of the fastest-growing investment platforms in the U.S. Reports suggest Robinhood will begin trading on July 29, according to CNN, citing "a person familiar with the matter."
In an amended S-1 filed with the Securities and Exchange Commission (SEC) on Monday, Robinhood provided additional details about its upcoming IPO. The company plans to list its shares on the Nasdaq Stock Exchange using the ticker symbol "HOOD." Robinhood will offer 52,375,000 shares of stock, with an additional 2,625,000 being sold by insiders.
Management plans to price shares in a range of $38 to $42, though that could change based on investor demand. At the high end of that range, Robinhood could raise nearly $2.2 billion, resulting in a valuation of roughly $35 billion.
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Disrupting stock trading
According to its regulatory filing, Robinhood is on a mission "to democratize finance for all." The company disrupted the stodgy investing industry by pioneering commission-free trades, forcing other brokerage firms to quickly follow suit. With pervasive lockdowns at various times last year due to the pandemic, many people turned to investing for the first time, and Robinhood was there to answer the call.
For the fiscal year ended Dec. 31, 2020, the company reported revenue of $958.8 million, up 245% compared to 2019. Its impressive revenue growth helped drive the company to profitability, as net income grew to $7.4 million, up from a loss of $106.6 million.
Robinhood's customer and account metrics are equally compelling. As of March 31, 2021, the company reported monthly active users (MAUs) of 17.7 million, up 105%, compared to the prior-year period, driving the number of funded accounts to 18 million, up from just 7.2 million. This drove Robinhood's assets under custody to $80.9 billion, up more than fourfold.
Growing like a weed
Its impressive growth continued into this year. For the three months ended March 31, 2021, revenue of $522.1 million soared 200% year over year. At the same time, its net loss surged to $1.4 billion, but that requires context. After a round of private equity fundraising in February, the company took a write-down in the fair value of its convertible notes and warrants, resulting in the loss.
Preliminary second-quarter results suggest its robust growth has continued. Robinhood is expecting revenue in a range of $546 million to $574 million, which would represent growth of roughly 130% at the midpoint of its estimate, resulting in a net loss of roughly $512 million.
For the three months ended June 30, 2021, Robinhood is estimating that its MAUs have grown to 21.3 million, more than double the 10.2 million from the prior-year period. At the same time, the company estimates that its assets under custody have tripled to $102 billion.
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Not without risk
While Robinhood has made headway in its mission to "democratize finance," the company isn't without its detractors. Some fear that the methods employed within the Robinhood app to make investing appealing to younger investors also tend to "gamify" the process. If not taken seriously, this could result in big losses for those without experience.
Robinhood is not without risk. In order to institute commission-free trading, the company passes along its stock trades to market makers, getting paid a commission in a process known as "payment for order flow" (PFOF).
Critics charge that Robinhood is abdicating its financial responsibility to customers. SEC Chair Gary Gensler recently pointed out that PFOF is illegal in a number of countries, including the U.K., and some lawmakers have suggested the practice should be banned in the U.S.
Such a move isn't likely in the near term, as it would force many brokerages to abandon commission-free trading, likely leading to an uproar from retail investors. We don't know how this will ultimately play out, but Robinhood noted in its regulatory filing that "regulatory authorities or legislative bodies ... could substantially limit or ban such practices."
Should investors take "stock" in Robinhood?
Robinhood is planning to set aside between 20% and 35% of its shares to allow customers to participate in its IPO. Users can request to buy shares at the IPO price via Robinhood's IPO Access feature, though that doesn't guarantee that every investor will get the number of shares they request.
It's important to note that investing in IPOs is inherently more risky than buying stock in more established public companies. In all likelihood, Robinhood stock will be volatile out of the gate when it debuts next week. There's also the potential that it could immediately become a meme stock, catching the attention of the WallStreetBets crowd, which could substantially ramp up that volatility.
That said, for investors with a stomach for some additional risk, buying an appropriately sized (read "small") investment in Robinhood could be a way to harness the potential of the ongoing fintech revolution.
