Investors that have been eagerly anticipating the debut of popular fintech company Robinhood now have some concrete details about what could be one of the biggest of the year.
The company just announced plans to raise $2.3 billion in an initial public offering and expects to sell its shares between the price range of $38 and $42. Robinhood will trade on the NASDAQ under the ticker symbol HOOD and could be worth as much as $35 billion.
The controversial trading application has played a big part in introducing financial markets to an entirely new generation and has certainly made an impact on the brokerage industry after being the first company to offer commission-free trading. There is no official IPO date yet for Robinhood, but it will likely occur in the next few weeks.
While these types of high-profile market debuts can be hit or miss in terms of how the stock performs after going public, it still makes sense for investors to familiarize themselves with the company and why it’s generating so much hype.
Here are 3 things for investors to know about the Robinhood IPO.
1. Founder-Led Company
Many investors are instantly attracted to a company based solely on the fact that it is founder-led. These are businesses in which the founder is president, CEO, board member, or chairman of the company, which means they will play a significant role in driving innovation and growth over the long term.
This is the case with Robinhood, as the company’s founder Vlad Tenev and Co-Founder Baiju Bhatt are going to be heavily involved in operations as CEO and Chief Creative Officer of the company, respectively.
The logic here is pretty straightforward—founder-led companies are attractive because founders have a big vested interest in the company’s long-term success. A very significant portion of their net worth is tied to how the company performs, and they tend to have an owner’s mindset that leads to quick decision-making and strong company culture.
Look at companies like Tesla (NASDAQ:) and Amazon (NASDAQ:) for classic examples of founder-led company success stories. According to filings, Robinhood’s Tenev will control about 7.9% of Robinhood’s outstanding stock along with 26.2% of the voting power of the outstanding stock, which means a founder will play a critical role in the company’s evolution.
2. Strong Top-Line Growth
Robinhood is a company that has experienced impressive top-line growth over the last year, which was largely driven by the global pandemic and record trading volumes. Thanks to plenty of extra cash from stimulus checks, unprecedented market volatility, and stay-at-home orders, the company found itself in a near-perfect situation to grow its business.
Robinhood offers equity, cryptocurrency, and options trading on its popular application and saw total revenue grow by 245% year-over-year in 2020 to reach $959 million. For the three months ended Mar. 31, 2021, total revenue reached $522 million, up 309% year-over-year.
These figures are certainly impressive, and the fact that Robinhood’s number of funded accounts increased by 150% year-over-year during the first three months of 2021 to 18 million confirms that the application is as popular as ever.
It’s also worth mentioning that Robinhood reported a net loss of $1.4 billion during the first three months of 2021, which tells us that the company is still a way off from consistent profitability. While there is the possibility that slower trading volumes impact Robinhood’s growth going forward, this disruptive company has clearly struck a chord with younger investors and is seeing top-line growth that makes it an intriguing fintech stock to monitor.
3. Stealing From The Rich To Give To The Poor? Not Exactly…
It’s a bit ironic that a company called Robinhood generates the majority of its revenue by selling its customers’ order flows to market makers and high-frequency trading firms. This can lead to larger bid-ask spreads and poor order execution, which both might result in taking money out of retail traders’ pockets.
Companies that generate transaction-based revenue in this manner earn a small payment as compensation from directing orders to major market makers like Citadel. Payment for order flow is a big reason why Robinhood can offer commission-free trading, and it is a model that a lot of other big brokerages use.
The controversy surrounding this business model is mainly due to the potential conflicts of interest, as brokers collect more money from routing their customers’ orders to principal trading firms or electronic market makers that can execute the orders at a profit.
A broker should be focused on getting its clients the best available prices, and many wonder how Robinhood can do so with its business model. The SEC has already fined Robinhood millions for failing its best execution responsibilities, and it’s certainly going to be interesting to see how the company’s business model holds up going forward.