Robinhood IPO: what you need to know

Millennial-friendly, no-fee trading app Robinhood is preparing an IPO. Here’s what you need to know before it goes public. 

What you need to know about the Robinhood IPO 

What is Robinhood? 

If you’ve not been keeping up with the Reddit-led, meme stock headlines. Robinhood has been one of the key players in the GameStop short squeeze. 

It’s a US-based stock trading app, currently used by 13 million users. According to its website, Robinhood is on a mission to “democratize finance for all”. It hopes to create and guide a new generation of US investors, through no commission, fractional share dealing, and an easy-to-use application. 

Robinhood has been a bit of a market disruptor.  Since launching in 2013 and growing its user base, it has forced other US brokers to lower their commissions to remain competitive, and even instigated mergers between previous leading brokers, such as Morgan Stanley’s acquisition of E*TRADE in October 2020. 

Many Reddit traders have chosen to use Robinhood to buy and sell the latest meme stocks, like GameStop and AMC. While Robinhood halted trading of these stocks during the height of the GameStop frenzy, it is subsequently offering them again at the time of writing.  

It’s also been the app of choice for many investors interested in Dogecoin, a cryptocurrency that originally started as a joke but is gaining traction as a legitimate digital token. 

What is Robinhood’s business model? 

Instead of charging commissions, Robinhood makes its money through payments for order flow. This practice involves directing investors to different parties, in this case market makers. While payments for order flow is usually priced per-share, Robinhood instead employs a fixed rate per-spread. It’s higher than the rate its competitors receive.  

Robinhood generated $180m from trades in Q2 2020.  

These “behind-the-scenes” activities are banned in the UK and Europe. Regulators in these geographies believe it creates a conflict of interest, as firms are thought to offer direct client trades to partners providing the biggest kick-back, rather than ensuring clients receive the best available price. 

Other revenue sources include Robinhood’s “Gold” service, which offers users additional benefits for a $5 monthly fee, margin lending, and securities lending. 

Part of the company’s remit is to try and capture a younger audience than other brokers. This appears to be working. The average age of Robinhood investors is 31 years old. Millennial investors are apparently particularly drawn to Robinhood’s sleek, easy-to-use app interface. 

How much is Robinhood worth? 

We won’t know the full Robinhood valuation until its IPO launches, but we can look at its capital raising efforts to date to get a clearer picture. 

Since being founded in 2013, Robinhood has raised $2.2bn. Also, like many competitor investment platforms, Robinhood has seen a surge in demand during the pandemic, as retail clients head into the stock market on hopes of a later market recovery. 

The timing of its IPO, sometime in Q1 2020, means Robinhood is banking on capturing as much of this pandemic-led investment activity as possible, and could boost its valuation.   

Forecasts have placed Robinhood’s IPO valuation at $12bn – in the same league as what Morgan Stanley paid to acquire E*TRADE, although E*TRADE did control assets worth north of $3 trillion at the time of the acquisition. That’s roughly 30 times the value of assets Robinhood currently controls. 

Robinhood does, however, outstrip competitor platforms when it comes to daily average revenue trades (DARTs). Here’s how the app ranks against other US brokers: 

  • Robinhood – 4.3m DARTs 
  • TD Ameritrade – 3.8m DARTs 
  • Interactive Brokers – 1.9m DARTs 
  • Charles Schwab – 1.8m DARTs 
  • E*TRADE – 1.1m DARTs 

Is this sustainable? Bear in mind Robinhood’s user base contains a lot of users coming from /r/Wallstreetbets recommendations and hope to capitalise on events like the GameStop short squeeze. Market volatility is also likely to return to normalcy post-pandemic, which could put a slow down on client acquisition and their trading activity. 

Challenges for Robinhood 

Sustaining its enormous growth will be a top challenge for Robinhood for reasons explained above. But there are other issues at play here. 

One is transactional value and encouraging users to invest more capital into the platform. For instance, Robinhood’s average client balance is $1,500. Its competitor Charles Schwab’s average sits at $135,000. 

This might be a problem of perception. Robinhood’s entire ethos is based around it helping the “little guy”: younger investors with limited capital to share, who are potentially more susceptible to tips from sources like /r/Wallstreetbets subreddit.  

When Robinhood withdrew AMC and GameStop trading at the height of the squeeze, it also drew criticism and investor outrage. Subsequent outages have also resulted in lawsuits. It may have to pay $26 million in regulatory fees resulting from the Reddit-led fiasco.  

Investors may also lose trust in Robinhood. In December 2020, Robinhood paid $65 million to settle charges from the feds that it misled users about how it was making money and failed to deliver the best execution it had promised on trades. Not a great look. 

As younger investors become wiser to the ways of the market, and better informed, Robinhood may suffer. And, despite bursting onto the scene, its competitors have lowered their commissions, so Robinhood may not be the cheapest option out there anymore. 

It’s certainly an interesting IPO to watch. Robinhood as made great ground over the past decade, growing its user base from 100,000 investors to the 13 million it boasts today. Can it keep going? 

The Robinhood IPO is expected to launch in Q1 2021. 

Open an account to begin trading Robinhood CFDs as soon as they become available