Robinhood IPO launch misses the mark

Equities

Robinhood IPO

Robinhood’s IPO launches with a fizzle

Robinhood, the app that seeks to democratise finance, has had a bit of a disappointing opening after launching on the Nasdaq on Thursday.

Out of the gate, share performance has already stumbled.

Shares opened at $38 at the lower end of Robinhood’s speculated price. The top end of its launch target was $42. While this was in line with Wall Street expectations, what happened next wasn’t.

Shares immediately fell, falling as far as 12%, and closing out the US session 8.4% lower at $34.82. With this the trading app’s valuation dropped to $29bn after having briefly reached $32bn on Wednesday pre-trading.

Data from Dealogic suggests the average first-day jump for US IPOs in 2021 is 39%. Compared against that, Robinhood’s launch is a very damp squib.

Robinhood was still one of the most popular stocks for traders during its first full day. 100 million HOOD shares exchanged hands for a value of $3.7bn. This surpassed other tech stocks like Tesla and Apple in terms of exchanged share volume, possibly from traders keen to trade the dip.

Why the drop?

It appears that institutional interest around this latest tech stock launch isn’t as high as Robinhood had hoped.

This is possibly down to higher scrutiny around the way Robinhood app is structured. Regulators in particular have issues with how the app appears to run on gamification models, rather than standard trading app infrastructure. A lack of customer support features – a bit of a no-no for a brand that has lofty egalitarian aims – has also attracted regulators’ ire.

The thing that really gets regulators’ goat about Robinhood is its controversial practice of selling trades. Robinhood uses payment by order flow, the long and short of which essentially results in higher retail investment commissions.

The Financial Industry Regulatory Authority (FINRA) issued its largest-ever penalty against Robinhood in June, $70m, for “widespread and significant harm” to customers. Not great optics for a company on the verge of going public as Robinhood was at the time.

FINRA opened another investigation into the California-based firm on July 26th into whether co-founders Vlad Tenev and Baiju Bhatt had failed to register with the regulator following the publishing of an updated company prospectus.

Then there are sustainability issues. The vast majority of Robinhood’s 31 million users become investors during the Covid-19 pandemic. Many of its users are fairly new and naïve to the complexities of investing. Robinhood also became the platform of choice for those participating in the recent meme stocks surge.

Robinhood has been on an impressive growth journey because of this. The number of accounts on its platform has doubled since the start of 2021.

But is this really sustainable? Will its customers, which tend to be young and inexperienced, want to keep going once Covid-19 restrictions are lifted fully around the world? It’s this uncertainty that could have dampened the tech stock’s appeal.

We also have questions around voting rights. Normally one share = one vote. That’s standard practice a lot of the time. However, founders Bhatt and Tenev keep voting control over Robinhood via its dual-class structure. The pair enjoys 65% voting control – despite owning less than 20% of its company shares.

Robinhood customers were supposed to be allocated up to 35% of shares upon the IPO launch, but this now appears to be more about 20%.

Again, this isn’t particularly democratic for an app that seeks to bring financial trading to the masses.

Where next for Robinhood?

Even though it missed quite a large target, Robinhood still proved very popular with retail traders.

Price action seems inextricably linked with the FINRA investigation and public perception of the brand going forward. Customer retention will be key here too. We’ll be watching Robinhood with great interest going forward.