Video source: YouTube, CNBC Television
By Stan Choe and Alex Veiga
Robinhood Markets Inc's shares closed more than 8% lower at $34.82 per share on their first day of trading, as many investors who used the popular trading app to participate in this year's "meme" stock trading frenzy snubbed its initial public offering (IPO).
Only 16 of the 99 U.S.-listed companies that were worth at least $10 billion when they went public declined on their first day, according to Dealogic, whose data goes back to 1995.
“A year ago we were trading the stock at 15 bucks a share. And our most recent trades in early June were $55 a share [in the private market],” said Glen Anderson, president of Rainmaker Securities, a secondary trading platform for private pre-IPO shares. Anderson said they traded about $200 million in Robinhood stocks in the private market last year.
Robinhood's easy-to-use interface has made it a hit among young investors trading from home on cryptocurrencies and stocks such as GameStop Corp during the COVID-19 pandemic.
Some IPO investors stayed on the sidelines, citing concerns over its frothy valuation, the risk of regulators cracking down on Robinhood's business, and lingering anger with the company's imposition of trading curbs when the meme stock trading frenzy flared in January.
In an unusual move, Robinhood had said it would reserve between 20% and 35% of its shares for its users.
Many IPOs benefit from excluding retail investors, who end up fueling a first-day trading pop by snapping up shares in the open market. By letting many retail investors under the IPO tent, Robinhood made big gains less likely for investors on the first day. "The market believes that institutional investors will hold on for a longer time, and retail investors are more likely to flip," said Reena Aggarwal, professor of finance at Georgetown University.
Robinhood shares priced at $38 in the IPO, the low end of the filing range.
Stanford University roommates Vlad Tenev and Baiju Bhatt founded the company in 2013. The two will hold a majority of the voting power, with Bhatt keeping around 39% of the outstanding stock and Tenev about 26.2%.
"It maybe seemed like a good idea to offer [the IPO] to your customers, but it might not be very helpful when it comes to controlling how the shares are allocated and the beginning of the trading of this IPO," said Kathleen Smith at Renaissance Capital in Greenwich, Connecticut.
Robinhood enraged some investors and U.S. lawmakers this year when it restricted trading in some popular stocks following a 10-fold rise in deposit requirements at its clearinghouse. It has been at the center of many regulatory probes.
The company disclosed this week that it has received inquiries from U.S. regulators looking into whether its employees traded shares of GameStop and AMC Entertainment Holdings, Inc before the trading curbs were placed at the end of January.
Here are a few things to keep in mind as Robinhood now trades publicly:
HOW DOES A FREE SERVICE MAKE MONEY?
Robinhood’s revenue soared 245% last year to $959 million. It then hit $522 million in the first three months of 2021 alone, more than quadrupling from the year-ago level.
Robinhood doesn’t charge trading commissions or require customers to carry big balances — one reason why it’s so popular. It makes the bulk of its money — 81% of revenue in the first quarter— by funneling investors’ orders to big trading firms, such as Citadel Securities, which take the other side of the trade. They also give a payment to Robinhood.
The practice, called “payment for order flow,” has drawn criticism from lawmakers and regulators. But legal experts say tighter regulation may be difficult to bring about. Brokerages need to make money somehow, and if Robinhood can’t get it from payment for order flow, it could go back to charging trading commissions, said Joshua Mitts, a law professor at Columbia University.
WHAT IF THE TRADING BOOM FIZZLES?
Even if payment for order flow sticks around, Robinhood’s dependence on the practice could be an issue. During normal times, Robinhood may get about 75% of its money from transaction-based revenue, roughly triple what some competitors get, said Tom Mason, senior research analyst at S&P Global Market Intelligence.
Robinhood says its revenue could fall in the July-September quarter when compared to the April-June period, when revenue rose an estimated 124% to 135%. Besides seasonality issues, Robinhood said it expects to see decreased levels of trading activity, particularly in cryptocurrencies, which accounted for 17% of revenue in the first three months of the year.
Among other risks, Robinhood’s customers could spend less time on the app if a fading pandemic means they can go on with their lives and do other things with money.
Robinhood also hasn’t always kept customers happy: Its platform has had some high-profile outages, and early this year it temporarily barred investors from making trades in GameStop, when manic movements in its stock were the talk of the market.
TRUSTING CUSTOMERS AS INVESTORS
Robinhood is taking the unusual step of allowing users of its trading app to buy up to 35% of its IPO shares before they begin trading. That’s the largest portion by far of pre-IPO shares to be designated for retail investors in an underwritten offering, says Matt Kennedy, senior IPO market strategist at Renaissance Capital.
Typically, only institutional investors and company insiders can buy shares in companies before they go public, and ordinary investors miss out on any first day pop. Between 2001 and 2020 the average U.S. IPO returned 14.5% from the offer price on day one, according to Renaissance Capital. The return this year is an even-better 25% when looking at IPOs that raise at least $100 million.
The biggest risk, Kennedy says, is that retail investors are more likely than institutional traders to flip their shares for a quick profit, raising the possibility of increased volatility on the first day of trading. For its part, Robinhood has warned that users who sell IPO shares within 30 days of the IPO will be restricted from buying shares in IPOs on Robinhood’s platform for 60 days.
Reporting by Echo Wang in New York; Noor Zainab Hussain, Ankur Banerjee and Niket Nishant in Bengaluru; Editing by Arun Koyyur and Howard Goller.