The rapidly growing trading company couldn’t raise as much money as hoped. Robinhood’s IPO at a price of $ 38 per share, the lower end of the expected range. That suggests that demand for the controversial company may have been weaker than expected. The deal values Robinhood at about $ 32 billion, making it more valuable than big companies like Nasdaq (NDAQ), Southwest Airlines (LUV) and Kroger (KR). That is well above the $ 12 billion price of Robinhood in its most recent private funding round.
And yet Robinhood failed to reach its target valuation of $ 35 billion.
The IPO brings in $ 2.1 billion and Robinhood is expected to trade on Thursday under the symbol “HOOD” on the Nasdaq.
The deal is still a major milestone for a company that revolutionized the way Americans invest and is growing explosively.
“The business was great fun. They have a great platform to build on, ”said David Weild, former vice chairman of Nasdaq and now CEO of investment bank Weild & Co.
Robinhood’s sales have increased 245% to $ 959 million last year as user growth and trading volume skyrocketed.
Robert Le, an analyst at PitchBook, said Robinhood seemed to be leaving some cash on the table to help its stock price rise on day one.
“Robinhood is playing it safe here,” Le said in an email. “A successful novel IPO has more than a few hundred million dollars in the company’s bank.”
“It seems to be rich”
But investors are paying a premium for that growth.
At the high end of Robinhood’s IPO palette, the deal would have valued the company at roughly 22 times trailing revenue, according to Renaissance Capital. That compares to multiples of just five for Charles Schwab (SCHW), a rival that is expanding more slowly. “It seems to be rich – unless the company can maintain that high growth,” said Kathleen Smith, a director at Renaissance Capital who manages the Renaissance IPO ETF (initial public offering). Robin Hood completely disturbed the online brokerage industry through the pioneer of commission-free trading. When Robinhood attracted new and existing investors to its platform, competitors were forced to cut trading fees and band together to survive.
Now Robinhood is disrupting the IPO process. The company allows its users to buy a portion – up to a third – of the IPO’s stock before they start trading on the Nasdaq. Usually only corporate insiders and powerful institutions get access to these coveted stocks.
New regulatory probes revealed
Robinhood’s public debut was delayed by a Series of controversies, the end record-breaking settlements too massive Failureswho have favourited questions about the business model, the management team, and the company’s ability to keep up with its explosive growth. Just this week Robinhood announced that regulators are investigating the fact that CEO Vlad Tenev is not with FINRA. licensed, Wall Street’s powerful self-regulatory agency. (Robinhood has argued that Tenev does not need to be licensed because he is the CEO of the parent company, not the broker-dealer). The Financial Industry Regulatory Authority and the Securities and Exchange Commission are also investigating whether Robinhood employees have shares in GameStop (GME), AMC (AMC) and other “meme” stocks ahead of the trading platform’s infamous trading restrictions in January. Last month, FINRA beat the brokerage firm with its highest sentence to date, accusing the company of harming millions of customers and providing “false or misleading information” to investors. FINRA quotes in partial options trading proceedings in the center of a Recently settled family lawsuit a 20 year old Robinhood dealer who died of suicide last year.
Robinhood has neither admitted nor denied the FINRA charges.
Weild, the former Nasdaq executive, said Robinhood’s struggles may have only raised public awareness of the company – something that ironically helps. He compared the situation to the challenges America Online faced during its rapid expansion.
“All it did was increase their visibility and branding,” said Weild.
Other companies with legal problems have also been able to go public, including Airbnb and above (ABOUT).
“These are not free apps”
But Robinhood’s struggles have also shed bright light on the company’s controversial business model known as paying for the flow of orders. Like some other online brokers, Robinhood makes most of its revenue from selling its retail order flow to high-speed trading companies like Citadel Securities.
Robinhood argues that this tactic will benefit everyday investors as it paved the way for commission-free trading. But others say it’s really the high-speed trading firms that benefit – otherwise they wouldn’t be paying Robinhood for the flow of orders.
Now the business model that Robinhood relies on is in question. The Securities and Exchange Commission verifies the payment for the order flow. SEC chairman Gary Gensler warned in May that there were “inherent” conflicts of interest with this business model and expressed concern about them playful nature of trading apps.
“These are not free apps. They are just free apps. The costs are within the scope of the order,” Gensler told the legislature.
If the SEC bans paying for the flow of orders, it would deal a blow to Robinhood.
“We believe paying for the flow of orders is a benefit for retail investors,” said Le. “But if the regulators don’t see it that way and forbid it, Robinhood will have to find new sources of income. That would be a great risk.”
Leveraged by the market boom
Robinhood not only faces competition from established online brokers, but also from Upstarts like Public.com and Invstr market the fact that they do not sell the retail order flow to high speed traders.
Smith, the manager of Renaissance Capital, said another risk was how closely Robinhood’s bottom line was tied to the fate of booming markets.
“What if we get a negative market? People could easily be put off if they lose money,” said Smith. “This company is so focused on the equity and crypto markets. A downturn would hurt Robinhood more than a Charles Schwab. ”