Robinhood is now available to the general public. Is it a good idea to invest in the stock? This is especially true for HOOD by Robinhood Markets Inc.
Because the app-focused discount brokerage company will direct up to 35 percent of the initial public offering (IPO) to us, there will be 18 million users, including myself.
Here are the primary advantages and disadvantages. According to Renaissance Capital, the IPO will most likely take place the week of July 26. At that point, we’ll hear more about the missing piece of the puzzle: the IPO price. Let’s start with the positives: there are six of them. Even though Robinhood is divisive, it is undeniably a terrific company. The five most eye-popping revelations in Robinhood’s IPO filing may be found here. 1. Rapid development The public relations disasters at Robinhood — a frozen trading platform at vital times, a record regulatory penalties — haven’t slowed user growth. It’s a huge deal. Accounts increased by 143 percent to 12.5 million last year, while revenue increased by 245 percent. This trend continued in the first quarter, when accounts increased by 151% to 18 million, while revenue increased by 309% year over year. “What strikes me is their development. Considering the fact that the majority of consumers are first-time investors,” says Matthew Kennedy, senior strategist at Renaissance Capital, which operates the IPO exchange traded fund Renaissance IPO ETF IPO, -0.26 percent.
The brokerage is expected to retain first-time investors for a long time. Sure, there will be a slowdown in growth. The momentum, though, will continue, and there is still plenty of room for more. According to competitor Charles Schwab SCHW, -2.49 percent, U.S. investors have $50 trillion in investment accounts. Robinhood’s consumer assets are $81 billion. 2. Robinhood has developed a strong brand. The company has been chastised for platform outages, pushing the “gamification” of investing, and limiting trading in meme stocks such as AMC Entertainment AMC, -8.56 percent, and GameStop GME, -2.11 percent.
Suits and fines have resulted as a result of this. However, the public has a short memory, and statistics back up Robinhood’s brand and platform’s popularity. Over 80% of new accounts are generated through customer referrals or those who sign up without being encouraged by marketing. (This is referred to as “organic” growth by Robinhood.) From 2016 to 2021, Robinhood accounted for over half of all new retail accounts opened in the United States. That’s quite incredible. In retail customer-facing firms, brands are crucial, especially when they contribute to defensive moats. 3. It is a founder-led business. Founder-led businesses outperform, according to academic studies and my own experience as an investor. When I recommend firms in my stock newsletter, Brush Up on Stocks, one of the important features I look for is this (the link to the letter is in my bio, below). More than money motivates company founders like Jeff Bezos of Amazon.com AMZN, +0.37 percent and Elon Musk of Tesla TSLA, +0.53 percent. They are enthusiastic about starting and growing enterprises. This is the type of asset manager you want in your portfolio. Vladimir Tenev and Baiju Bhatt, who are now the CEO and chief creative officer of Robinhood, started the company in 2013. 4. Profit margins may be substantial. The company’s profit margins could be large, in part because its brand and platform attract clients at a low cost. Payment for order flow – directing transactions to market platforms like Citadel — is Robinhood’s principal source of revenue, and the fees are modest. “There isn’t a lot of revenue cost here,” Kennedy explains. “Order flow payment is by definition a high-margin business.” 5. There’s a lot of room for expansion. A land-and-expand approach is used by Robinhood. It finds its way into the lives of the youthful generation – those who are just getting their financial feet wet. Robinhood will supply more products as they progress and demand them, allowing them to collect more income per customer. “They have a lot of young and eager customers,” says James Angel, a finance professor at Georgetown University’s McDonough School of Business. “They’ll require additional services like car loans, credit cards, mortgages, and retirement advice.” These are massive markets. According to Square SQ, -0.48 percent, credit card purchases in the United States totaled $3.6 trillion last year, while peer-to-peer transfers totaled $4 trillion.
In Europe and Asia, Robinhood has room to expand.
6. Executives have the freedom to consider the long term. The objective of Robinhood is to “democratize finance for all,” according to the company. As a result, it’s paradoxical that the corporation is far from democratic. It has established special share classes to concentrate voting power in the hands of a few individuals. This sounds dreadful. It’s considered “undemocratic.” Here’s a small secret, though: This can be a significant benefit to investors. Please consider what I’m saying. By reducing the prospect of unhappy outsiders gaining board seats, Robinhood is able to “annoy” short-term investors by foregoing near-term returns in order to invest earnings back into the company. This provides management with the extremely valuable ability to think strategically and make better judgments. Many of the best-performing companies, including Facebook FB, -0.24 percent, Amazon.com, and Alphabet GOOGL, +1.56 percent, took advantage of this quality.
Investors in Robinhood will have to deal with significant dangers. Here’s a summary. 1. Regulators take action. Politicians and authorities are concerned about how simple it is for users to interact with the stock market through Robinhood. It’s referred to as “gamification” by critics. This is made possible by the app’s user-friendliness. Regulators are concerned that it could encourage customer-unfriendly conduct, such as excessive trading. Robinhood has already been fined $70 million by the Financial Industry Regulatory Authority (FINRA), in part for allegedly not thoroughly verifying clients before accepting them for options trading and margin accounts, as well as for failing to adequately disclose risks. After charging Robinhood with deceiving clients about how the app earns money and failing to deliver optimum execution of deals, the Securities and Exchange Commission (SEC) penalized the company $65 million. The company is being pursued by Massachusetts regulators, who accuse it of aggressive marketing to naive investors. “Clearly, the SEC and FINRA are looking at the user interface,” says William Mann, The Motley Fool’s director of small-cap research. “At some point, a critical mass of individual investors will suffer enough losses that regulators will be forced to act and impose some restrictions on the tactics that Robinhood employs to keep trading entertaining. We’re only a social brokerage crisis away from the SEC and FINRA becoming much more important.” Next, payment for order flow, which entails selling trades to third parties, accounted for over 80% of Robinhood’s $522 million in overall first-quarter income. According to SEC Chair Gary Gensler, this might lead to a conflict of interest with a broker’s obligation to offer the best execution. It will be a challenge for Robinhood if regulators shut it down or restrict it in some way. Private lawsuits have also been filed against Robinhood over platform downtime. 2. Crypto explodes Because of criminals’ use of cryptocurrency, regulators around the world may take action. Competition in the generation of money supply irritates central banks. According to Kennedy of Renaissance Capital, crackdowns would be a concern for Robinhood because crypto trading accounted for 17 percent of its $420 million first-quarter transaction-based income. 3. The retail trading boom is winding down. Kennedy warns, “The growth in retail trading definitely helps them, and we don’t know how stable that is.” “Many of their merchants have profited. Meme stocks have performed nicely, as has cryptocurrency. But if the returns stop coming in, that revenue will dry up,” he warns. Because it makes so much money from hazardous options trading (approximately 38 percent in the first quarter), Robinhood may be particularly vulnerable among brokerages. “Options and cryptocurrency generate a smaller amount of revenue for traditional brokerages. If there is a significant market downturn, all of that trade might quickly dry up.” 4. Revenue is wiped out in a bad market. Is Robinhood’s IPO “calling” the market top? It’s a possibility, and Robinhood wouldn’t be the first to do so. According to Kennedy of Renaissance Capital, the first quarter was the busiest for IPOs since the last quarter of 1999 ($40.7 billion in gross proceeds in the United States). In the year 2000, the huge tech crash occurred. The bottom line: It’s important to remember that corporations decide when they want to go public. So, what’s this? They do it when it is convenient for them, not for you, the investor. The current IPO craze suggests that the S&P 500 SPX, +0.36%, Nasdaq COMP, +0.41%, and Dow Jones Industrial Average DJIA, +0.17% are at or near their all-time highs. “A lot of bubbly stuff is coming to market,” Angel, of Georgetown, adds. In bear markets, market-related businesses such as brokerages and money-management firms suffer greatly. That will happen sooner or later, and Robinhood’s payment for order flow and customer growth will plummet. Michael Brush is a MarketWatch columnist. He had no positions in any of the stocks discussed in this column at the time of publishing. Brush’s stock newsletter, Brush Up on Stocks, has recommended SCHW, FB, AMZN, and GOOGL. @mbrushstocks is his Twitter handle./n
