Aided by vast government stimulus and unlimited quantitative easing (QE), 2020/2021 proved to be especially lucrative for the U.S. stock markets. In fact, the leading American equities indices routinely posted fresh record highs amid the COVID-19 economic recovery. July 2021 brought a historic event for U.S. large cap stocks, as the Dow Jones Industrial Average (DJIA) eclipsed 35,000 for the first time ever.
Amid the 2020/2021 equities market bull run, hundreds of private companies brought an unprecedented number of initial public offerings (IPOs) to the market. During the first six months of 2021, new IPO listings reached a fevered-pitch, raising US$171 billion. This figure eclipsed the entire record year of 2020, which totalled US$168 billion. Among the prominent companies that launched IPOs in the first half of 2021 was Coinbase, UiPath and Squarespace. Zero-commission brokerage pioneer Robinhood elected to follow suit, officially announcing its intentions to go public on 1 July 2021.
What Is Robinhood?
Robinhood is a zero-commission brokerage service that caters to the non-professional retail trader. Robinhood's functionality is technology-oriented, enabling market participants to trade equities, options, exchange traded funds (ETFs) and cryptocurrencies via online or mobile application. Based in Menlo Park, California (USA), the company's vision reflects its leadership's core beliefs:
"We're on a mission to democratise finance for all. We believe the financial system should be built to work for everyone. That's why we create products that let you start investing at your own pace, on your own terms."
In order to "democratise finance for all," the company makes several commitments to its clientele:
- No account minimums or commissions are required to trade stocks, ETFs, options or cryptocurrencies.
- Robinhood Financial and Robinhood Securities are members of the Securities Investor Protection Corporation (SIPC). Accordingly, customers enjoy US$500,000 in coverage on securities and US$250,000 on cash.
- The company pledges to cover 100% of direct losses attributable to unauthorized activity on customer accounts.
- Robinhood's Best Execution Committee regularly analyses the quality of order execution being passed on to the trader.
Robinhood was founded by Vladimir Tenev and Baiju Bhatt, two Stanford University classmates who met in 2010. Following college, Tenev and Bhatt worked in New York City building high frequency trading (HFT) software and selling the platforms to hedge funds. In 2014, the two launched the app-based Robinhood brokerage service and continue to serve as co-CEOs. As of 2021, the company's popularity was highlighted by a client list of more than 18 million active users.
Robinhood's Business Segments
The company's business revenues are generated from six distinct segments:
- Rebates From Market Makers and Trading Venues: Robinhood maintains numerous affiliations with equities and cryptocurrency market makers. To compete for order flow with standardised exchanges, these outlets furnish Robinhood with rebates based on the price improvements afforded to the trader. This functionality is executed seamlessly via Robinhood Securities' proprietary algorithm, the "smart order router."
- Robinhood Gold: Robinhood gold is a subscription service that furnishes the user with a suite of premium features. Morningstar research reports, NASDAQ Level II Market Data, larger instant deposits and margin trading are the key attributes of Robinhood Gold. A $5 monthly fee and 2.5% annual interest rate on settled margin amounts above US$1000 generate the revenue from Robinhood Gold.
- Stock Loans: Robinhood produces income by lending margin securities to interested counterparties.
- Capital Income: The company deposits uninvested cash in interest-bearing accounts.
- Cash Management: Interchange fees stemming from the Robinhood debit card contribute to the company's gross revenue.
- Miscellaneous: Robinhood also profits from other activities, including the provision of proxy services and assorted fees. A few examples of the various levies are costs associated with expedited check deliveries, paper statements and regulatory trading fees.
Robinhood enjoys a prominent standing in the American equities marketplace and is viewed as being a pioneer of the "0% commission" brokerage service. While the company's size is less than the U.S. big five brokerages—TD Ameritrade, Etrade, Fidelity, Vanguard, and Charles Schwab—Robinhood did rank as CNBC's number-one financial system disruptor for 2021.
Robinhood's Funding And Valuation
Robinhood has a long history of private funding featuring some of the biggest names in finance. In total, the company has raised US$5.6 billion in private capital on 23 separate funding rounds (Seed through H). Among the lead investors are Ribbit Capital, D1 Capital Partners, Sequoia Capital and Institutional Venture Partners (IVP).
The onset of the COVID-19 pandemic brought unprecedented volatility and public interest to the capital markets. For Robinhood, the increased participation spurred growth projections and investor optimism. Subsequently, 2020 and early-2021 proved to be active periods on the fundraising front:
- 4 May 2020, Series F: Nine investors contributed a total of US$280 million. The lead investor was Sequoia Capital.
- 13 July 2020, Series F: Four investors contributed a total of US$320 million. The lead investor was IVP.
- 17 August 2020, Series G: Four investors contributed a total of US$200 million. The lead investor was D1 Capital Partners.
- 22 September 2020, Series G: Eight investors contributed a total of US$460 million, with no lead investor being listed.
- 29 January 2021, Series H: Two investors contributed a total of US$1 billion, with no lead investor being listed.
- 1 February 2021, Convertible Note Sale: Eight investors contributed a total of US$2.4 billion. The acting lead investor was Ribbit Capital.
Given the robust 2020/2021 growth in the valuations of many equities, ETFs and cryptocurrencies, venture capitalists eagerly invested in Robinhood's brokerage growth prospects. Since inception, the company's size has swelled to 2,100 full-time employees, 17.7 monthly active users and US$80 billion in assets under custody. With respect to these figures, Robinhood has garnered pre-IPO valuations upwards of US$40 billion.
Robinhood's S-1 Filing
On 1 July 2021, Robinhood Markets Inc. officially filed Form S-1 with United States Securities and Exchange Commission (SEC). The Form S-1 stated Robinhood's intention to go public and disclosed its corporate financials and details of the IPO listing. As of this writing in July 2021, a final date for IPO has not been set. However, Form S-1 states that the public sale will be conducted "as soon as practicable after this Registration Statement is declared effective."
Robinhood's S-1 filing made public the key details of the proposed IPO. Below are a few of the most important items from the preliminary prospectus:
- Underwriters: The lead underwriters of the IPO are investment banking giants Goldman Sachs & Co., Citigroup and J.P Morgan.
- Registration Fee: The IPO's registration fee is US$0.0001 par value per share of Class A Common Stock. This fee is calculated according to the Proposed Maximum Aggregate Offering Price of US$100,000,000. Accordingly, the listed fee is US$10,910.
- Listing: The company is seeking to be listed on the NASDAQ exchange under the ticker symbol HOOD.
- Use of Proceeds: Robinhood pledges to use proceeds from the IPO to service outstanding debt, as working capital, to expand the employee base and in the satisfaction of general capital needs.
Robinhood's Financial Metrics Go Public
Of greater interest to investors was the company's financial information. As a privately-held firm, Robinhood was not previously required to publicly report assets, debt and revenues. However, on Form S-1, the company disclosed its operational and financial internals. As of 31 March 2021, Robinhood boasted the following metrics:
- 18.0 million net cumulative funded accounts
- 17.7 million active monthly users
- US$81 billion in assets under custody
- More than 50% of Robinhood customers were first-time investors.
- More than 80% of Robinhood customers were organic or referred.
- Total revenues grew 245% from 2019 (US$278 million) to 2020 (US$959 million).
- For the first three months of 2021, total revenues grew 309% year-over-year.
- For the first three months of 2021, Robinhood's adjusted EBITDA (earnings before interest, taxes, depreciation and amortisation) rose to US$115 million. This figure was up from a negative US$47 million year over year.
Citing explosive growth in the company's customer base, revenues and the potential of the fintech industry, many investors eagerly anticipated the Robinhood IPO. In the spirit of "democratising finance for all" the company planned to set aside between 20% and 35% of Class A common stock for its own clients. As of this writing, the number of shares to be sold and per share price range has not been determined.
FINRA Fines Robinhood
Although Robinhood is a prominent figure in the discount brokerage arena, the company's business practices have been controversial. One day before its 1 July 2021 S-1 filing, Robinhood was fined US$70 million by the U.S. Financial Industry Regulatory Authority (FINRA) for platform failures experienced during the March 2020 COVID-19 market panic.
The levy was the largest of its kind and according to FINRA Executive Vice President Jessica Hopper, "the fine imposed in this matter, the highest ever levied by FINRA, reflects the scope and seriousness of Robinhood's violations." In settling the matter, Robinhood leadership neither confirmed nor denied the charges.
Robinhood's IPO: Reception And Performance
In the company's late July 2021 IPO, Robinhood (HOOD) received a lukewarm reception from Wall Street. During a series of pre-IPO private sales and a tumultuous debut, HOOD shares traded with heavy volatility. However, in the weeks that followed IPO day, prices stabilised as investor sentiment turned positive.
HOOD Priced At US$38 Pre-IPO
With the company's NASDAQ debut scheduled for Thursday, 29 July 2021, Robinhood scrambled to establish a viable IPO market price. To do so, the company worked with underwriters and investors, holding a series of pre-public sales on Wednesday, 28 July. Ultimately, the pre-IPO private HOOD stock offering brought about several noteworthy events:
- Corporate leadership and lead underwriters Goldman Sachs and JPMorgan Chase priced shares of HOOD at US$38 apiece. This valuation was at the low end of the company's US$38 to US$42 estimated offering range.
- Robinhood sold 52.4 million shares and raised nearly US$2 billion.
- Founders Vlad Tenev and Baiju Bhatt each personally sold US$50 million worth of HOOD stock.
In addition to pre-IPO sales, Robinhood chose to reserve between 20% and 35% of HOOD shares for Robinhood account holders. Also, company employees were free to sell 15% of their shares immediately, avoiding the traditional 6-month lockup period.
Bearish Reception On Wall Street
Robinhood officially made its Wall Street debut on 29 July 2021. The much-anticipated IPO was projected to be one of the largest of its kind. Unfortunately for inside stakeholders, the initial public reaction was skepticism.
For the 29 July session, the pricing of HOOD proved to be extremely volatile. Shares oscillated within a wide trading range, from a low of US$33.35 to a high of US$40.25. At the closing bell, HOOD settled at US$34.82, down 8.3% on the day.
The bearish price action of HOOD sent the company's market capitalisation to a first-day mark of US$29 billion. Although the sale did generate US$2 billion in new funds, the sluggish performance held values well short of HOOD's expected US$35 billion market cap. Ultimately, the initial sell off prompted many in finance to call the Robinhood IPO one of the worst of its kind.
Fortunately for Robinhood, history shows that IPO performance has little bearing on a stock's long-term returns. In fact, from 1980 to 2020, the average IPO run-up was 13%. However, the subsequent three-year performance lagged the market by an average of 14%. Accordingly, first-day performance is not an accurate barometer of intermediate or long-term returns.
Through the initial month of trade, shares of HOOD rallied well past the IPO opening price of US$38.00. From Thursday, 29 July 2021 to Friday, 27 August 2021, bidders sent Robinhood significantly higher:
- Share price closed at US$46.87 on 27 August 2021. This represented a 23.3% uptick for the first full four weeks of trade.
- On 4 August, HOOD posted an all-time high of US$85.00 per share before closing the day at US$70.39. At intraday highs, Robinhood shares rallied 81% and settled up more than 50% on the session.
Past Performance: Past Performance is not an indicator of future results.
Although the Robinhood IPO underperformed expectations, the following month brought an extended rally. Given the company's large customer base and explosive 2020/2021 revenue growth, many investors chose to bid HOOD stock at post-IPO prices.
Robinhood is a pioneer of the 0% commission brokerage industry and a growth-oriented fintech company. As of 31 March 2021, the company serviced 17.7 million active monthly customers and held US$81 billion in assets under custody. In the aggregate, 23 private funding rounds produced US$5.6 billion in capital and contributed to Robinhood's pre-IPO valuation north of US$40 billion.
The company filed Form S-1 with the SEC on 1 July 2021, officially requesting approval for its IPO. As of this writing, an official IPO date has yet to be determined but is expected to be held by the end of 2021.
FXCM Research Team
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