WHAT FOR ROBINHOOD AFTER IPO AND WHY IT IS IMPORTANT FOR INVESTORS TO KNOW

On July 29, the American broker Robinhood will go public. The broker has become the main beneficiary of the retail investment boom, survived an investor riot with Reddit, and is valued more than individual players with a long history ahead of the IPO. Will he manage to stay on the crest of the wave after the IPO, says Telman Shaganz, head of the capital market investment department at Tinkoff Investments

American broker Robinhood goes public. He will do it on July 29 on the NASDAQ. According to materials for the Securities and Exchange Commission (SEC), the startup's valuation could be about $ 35 billion. The company announced the offering price in the range of $ 38-42 per share.

Robinhood is going to list 55 million shares on the Nasdaq exchange, 95% - new shares. Almost all the funds raised will go to the company, which will use them to pay off part of the debts and further develop the business. Moreover, the existing shareholders will almost completely retain their investment in Robinhood, which means they have faith in the company. The organizers of the placement will receive options to buy another 5.5 million shares. It is highly likely that they will implement them. 

Finance for everyone

The Robinhood online platform has existed on the American market since 2013 and invites users to enter investments as “painlessly” as possible - or, rather, “commission-free”. For the United States, the idea became fresh and breakthrough: the old players in the brokerage market focused on the wealthiest citizens. Therefore, for each operation they took money from users - at that time it was on average about $ 10. Robinhood took a different path and offered free stock trading to private investors, thereby targeting the mass client. 

The project gained fame instantly, thanks to its publication in Hacker News, and in a day the founders saw 10,000 new user registrations, and in a year - about 1 million. However, the startup did not manage to attract the first venture capital immediately - only after more than seventy refusals, but invested into it immediately Index Ventures. He also helped get other investors: in particular, Google Ventures and Andreessen Horowitz. In total, at the seed stage at the end of 2013, the startup raised $ 3 million. Further, among those who assessed the prospects of the online broker were not only the well-known funds in the Valley, but also celebrities: the tone was set by the actor and singer Jared Leto in 2014. After him, the app was "noticed" by rappers Snoop Dog and Jay-Z (he invested through his company Arrive Venture Capital), attracted by the news that Robinhood is now working with cryptocurrency. The startup at that time was valued at $ 1.3 billion. 

Celebrity participation in a startup attracts both consumers (millennials and Gen Z) and investors to it. Word of mouth, in general, has become the main way of promoting the project - Robinhood never had powerful media advertising, it was not even budgeted for. Nevertheless, over the eight years of its existence, the startup has received money from 62 investors for a total of $ 5.6 billion, of which $ 3.4 billion - in 2021. 

In January 2021, after the final round of $ 2.4 billion in private funding, Robinhood was valued at $ 20 billion.

The stock market rally, bitcoin's skyrocketing growth, and the private investor riot with Reddit (after which the company had to receive emergency funding) brought the brand immensely. Robinhood has become the clear beneficiary of the private investor boom at the height of the pandemic. In 2020, the number of users with assets in their accounts has more than doubled. Growth continues this year. In the first quarter alone, it was 44% compared to the end of 2020. There are no exact data for the second quarter yet. The company predicts that the number of users with assets in their accounts will grow by another 25% QoQ.

You can earn on a free application

Transactions with most of the assets are free for Robinhood users (the project has a “premium” subscription, which gives access to more transactions). The broker charges the commission not from users, but from market makers for the order flow. It looks like this: Robinhood receives an application from a client and then sends it not directly to the exchange, but to a large wholesale player (market maker). This is often a company that trades high-frequency algorithms. The market maker, in turn, collects thousands of such orders and sends one large one to the exchange. Due to its scale, it significantly reduces costs and can also get the best price on the exchange. At the same time, Robinhood fulfills customer orders at a higher price in order to make a profit on the difference and pay for Robinhood's services to attract orders. Despite the overwhelming majority of investments in stocks, Robinhood earns the most not from them, but from trading options - options spreads are higher, which means commissions too.

Is the assessment fair

Robinhood's competitors are traditional brokerage houses - Fidelity, Charles Schwab, Interactive Brokers, e-Trade, and startups such as Webull, Sofi, and Acorns. The table shows that Robinhood can be valued much more expensive than the larger, traditional players in the field of asset management. And he shows much more significant growth.

There are several reasons for this: firstly, the idea still continues to attract the audience. According to the results of the first quarter of 2021, the startup has 18 million active users, of which 17.7 million are active monthly. Half of them are trying to invest for the first time.

In comparison with old US brokerage houses (such as Fidelity Investments and others), the numbers do not look the highest; these market players have many times more assets in dollar terms. However, Robinhood has a more active customer base - the number of downloads of the application is in the millions, not thousands, as in competitors, and for two to three months the application was in the first place in downloads in the American App Store (surpassed Tik Tok, Facebook, and others) ..

 

The users of the service have a very high frequency of trading and the number of transactions, and due to the large turnover - as well as small orders - in fact, all the activity on the markets are created, and liquidity grows.

Robinhood's portfolio monetization is also significantly higher. And this is the key reason why investors, still quite a young startup, value it several times more expensive than other market players. In addition, Robinhood is still a fintech project, and not just a financial company, which also adds to its attractiveness against the background of other American brokers.

Given the high growth rates of Robinhood, the company may place itself at an estimate of $ 40 billion, rather than $ 35 billion. Compare with other promising fintech, which, like Robinhood, are yet to go public. 

Possible Drivers for Robinhood's Further Growth

First, the growth of the audience. Now the application is used by about 20 million people, whose average age is 31, that is, they are mostly millennials, and according to the latest data from the US Census Bureau, there are 72 million of them in the States, or 92 million, according to Goldman Sachs. This means that the growth potential is still huge. In addition, the broker is currently working only in the United States and, in the event of geographic expansion, can significantly increase the client base.

In addition, you can expect an increase in the average customer account in the future. This can happen as the audience matures and their accumulations grow, as well as new products and services are launched. Currently, a Robinhood client holds an average of $ 5,000 on an account, while traditional brokerage houses have this figure measured in hundreds of thousands of dollars.

Another driver is the extension of the offer. The broker announced in May that it is launching a platform for private investors to participate in IPOs alongside huge Wall Street funds.

Prospects after the IPO

It is important to understand that the past year and the beginning of this year were extraordinary. Until now, Robinhood has devoted all its efforts to supporting growth in the United States, and the current very limited functionality of the site was enough. With the funds raised during the public offering, the broker will receive resources for the development of new products and services (adding new financial assets to the site, its own payment service, etc.), as well as expanding the geography. Now he only works in the USA. This can smooth out the transition period after explosive growth.

Among the favorable factors is the maturation of the core audience - millennials - which may be followed by an increase in investments.

Robinhood's reputation as a platform for speculative deals could limit this positive effect. Excessive attention from regulators also creates risks - they can introduce potential restrictions that complicate the work of a startup. In early July, Robinhood received a record $ 70 million fine from FINRA for harming millions of clients. FINRA investigated the actions of Robinhood and came to the conclusion that since the fall of 2016 the broker has incorrectly informed users about the possibility of entering into transactions with margin, about the number of funds on clients' accounts, their purchasing power, and the risk of losses in options. The company incorrectly reported negative account balances to some of its clients.

The attention of regulators can pose a threat to the entire business model, in which the main source of income is the payment of market makers for orders.

Also, do not forget that the competition in the brokerage market is growing. Large brokers not only reduce commissions but also consolidate. For example, Charles Schwab acquired TD Ameritrade, and Morgan Stanley bought the broker E-Trade. In addition, new, but already well-known players are entering the market.

And new players are not asleep: there are already projects that may press Robinhood in the future. For example, the Acorns application, where users do not make their own decisions about where to invest, but trust "artificial intelligence". The algorithm makes investment decisions based on user preferences. You don't need to spend a lot of time to figure out where to invest, the task is simplified even more, and this is what consumers are striving for.

 

#Vivian Blumenthal