Robinhood’s shares fell about 5% during their Nasdaq debut after trading near the lower end of the IPO range.
The online broker started at $ 38 per share, the lower end of its range, and valued the company at around $ 32 billion. After a decline of up to 10% to around $ 34, Robinhood’s market cap was approximately $ 29 billion.
The online broker is trading under the ticker HOOD for the first time and is reaching the public markets that it wants to democratize for amateur investors.
Robinhood, whose stock trading app has become increasingly popular with retail investors, sold shares on its IPO for $ 38 apiece on Wednesday night. Robinhood is valued at 10.5 times forward EBITDA.
The company sold 52.4 million shares for nearly $ 2 billion. Co-founders Vlad Tenev and Baiju Bhatt sold shares worth approximately $ 50 million each. The company was last valued at $ 11.7 billion in the private markets in September.
Goldman Sachs and JPMorgan Chase are the investment banks that led the deal. The syndicate banks have the option of buying another 5.5 million shares.
Unlike many recent IPOs, Robinhood has been profitable, posting net income of $ 7.45 million on net sales of $ 959 million in 2020 versus a loss of $ 107 million on sales of 278 million US dollars in 2019.
However, the brokerage had a $ 1.4 billion loss in the first quarter of 2021 related to losses related to emergency funding during the GameStop trading mania in January. The company had revenue of $ 522 million for the quarter, up 309% from $ 128 million a year earlier.
Founded in 2013, the free trade pioneer forced the brokerage industry to cut commissions for retail, lowering the barrier for millions of new investors to get public.
The app saw record numbers of new, younger traders going public during the coronavirus pandemic. This increase has continued into 2021, characterized by frenzied trading in so-called meme stocks. The stock trading app preferred by millennials found itself in the middle of a firestorm amid GameStop’s short squeeze, partly fueled by Reddit-fueled retail investors.
Robinhood – which offers stock, cryptocurrency, and options trading, as well as cash management accounts – had 18 million customers in March 2021, up from 7.2 million in 2020, a 151% increase. The company estimates its funded accounts hit $ 22.5 million in the second quarter.
Robinhood estimates that its 18 million residential customers and more than $ 80 billion in customer assets grew to 22.5 million users in the first quarter and more than $ 100 billion in the second quarter of 2021.
Assets under custody have grown to around $ 80 billion from $ 19.2 billion in March and are expected to exceed $ 100 billion in the second quarter.
Robinhood is the third largest broker based on the number of accounts it funds, behind Fidelity and Charles Schwab, who bought TD Ameritrade last year. Other competitors are Interactive Brokers and newer services like Webull and SoFi. Charles Schwab has a market capitalization of nearly $ 130 billion and Interactive Brokers has a market valuation of approximately $ 26 billion.
The Menlo Park, Calif. Based company reserved 20 to 35% of its IPO shares for its own customers in what will be one of the largest retail allotments of all time, according to CEO Tenev.
IPO shares have historically been reserved for Wall Street institutional investors or high net worth individuals. Retailers typically have no way of buying into newly listed companies until those stocks start trading on an exchange, so they miss the pop.
Robinhood’s loose lock-up structure is also unorthodox. Employees can sell 15% of their shares immediately after going public, compared to the traditional six-month lock-up period. After three months, investors can sell another 15%.
DST Global, Index Ventures, NEA, and Ribbit Capital are some of Robinhood’s largest venture capital investors.
Despite its rapid growth in recent years, Robinhood has some future risks.
Most importantly, the Securities and Exchange Commission reviews the payment for the flow of orders or the money brokerage firms received for referring client trades to market makers. This controversial practice accounted for around 80% of Robinhood’s sales in the first quarter.
The stock trading firm took a record $ 331 million in order flow payment in the first quarter of 2021, according to an SEC filing.
“We believe the order payment flow is a better deal for our customers compared to the old commission structure. It allows investors to invest smaller amounts without worrying about commission costs,” said Jason Warnick, CFO of Robinhood am Saturday at the company’s virtual roadshow. However, Warnick said Robinhood wanted to be fully involved in the regulatory and policy discussion on PFOF. He said if the model changed, Robinhood and the industry could adapt.
Robinhood – which is benefiting from its customers’ more speculative trading practices – also warned of a slowdown in trading revenues and account growth as the retail boom simmers. Options trading makes up about 38% of sales, while stocks and crypto make up 25% and 17% of sales, respectively.
“We expect our sales for the three months ended September 30, 2021 compared to the three months ended September 30 in cryptocurrencies,” said Robinhood in an amended prospectus published last week.
Robinhood also said the new customer growth rate will be lower in the third quarter of 2021 compared to the second quarter.
Robinhood is a five-time CNBC Disruptor 50 company and topped this year’s list.