Robinhood Marketplaces, the controversial online brokerage that popularized absolutely free inventory trades, ultimately filed its IPO paperwork on July 1. It hasn’t set a date for its public debut nonetheless, but it programs to “democratize” the method by featuring 20%-35% of its IPO shares specifically to its very own customers.
Some traders possible balk at the notion of investing in Robinhood following its missteps earlier this year. The system limited trades in very hot “meme shares” like GameStop (NYSE:GME) all through the Reddit-fueled shorter squeeze in late January, which sparked allegations of exterior interference from its non-public backers.
The debacle also highlighted the point that Robinhood’s “free” trades were being really funded by providing its purchase flows to market makers and substantial-frequency buying and selling (HFT) corporations. So as a substitute of acquiring shares on a public exchange, Robinhood sells orders to corporations that income from the bid-check with spread.
Robinhood isn’t the only brokerage to use this product, but its starring function in the meme inventory insanity, its gamification of stock trades, and a user’s suicide linked to a elaborate alternatives trade very last June all triggered traders, analysts, and regulators to transform in opposition to the platform.
All those headwinds may possibly make Robinhood feel like a terrible IPO to devote in. Nonetheless, I imagine it is nonetheless extra promising than lots of other recent tech IPOs — and I’d be prepared to obtain it, for four very simple motives.
1. It’s disruptive
At the conclusion of March, Robinhood’s range of funded accounts soared 150% calendar year-over-year and 44% quarter-around-quarter to 18 million. Its every month lively end users (MAUs) jumped 106% calendar year-above-yr and 51% quarter-above-quarter to 17.7 million , which suggests most of its users are actively investing stocks instead of passively holding them.
Most of Robinhood’s users are Gen Zers and Millennials. At the conclusion of March, around 70% of its AUC (property under custody) arrived from consumers between the ages of 18 to 40, with a median age of just 31. At the close of 2020, it tripled its variety of female users calendar year-about-year.
All those figures strongly suggest Robinhood is turning into the default buying and selling app for youthful and initially-time investors. That disruptive potential is rough to disregard, and must alarm standard brokerages.
2. It can be escalating like a weed
Robinhood’s earnings skyrocketed 245% to $958.8 million in 2020. 3-quarters of that complete came from transaction-based mostly revenue, together with its aforementioned payments for order flows (PFOF). The relaxation generally arrived from interest payments on its margin financial loans and protection lending, as properly as membership costs for its top quality tier, Robinhood Gold.
Robinhood’s transaction-centered income soared 322% during the 12 months, while its fascination-based profits elevated 151%. Its regular profits for every person (ARPU) rose 66% to $108.9. It also squeezed out a internet profit of $7.4 million, compared to a decline of $106.6 million in 2019.
In the to start with quarter of 2021, its earnings jumped 303% yr-over-year to $522.2 million, as its transaction and desire revenues rose 340% and 160%, respectively. Its ARPU rose 65% yr-around-yr to $137.
But it also incurred a net decline of $1.44 billion, compared to a reduction of $52.5 million a calendar year earlier, owing to an raise in the truthful benefit of its convertible notes and warrant liabilities. A significant portion of those people charges were connected to new convertible notes it issued just after the January shorter squeeze to continue to be solvent.
But excluding all those fees and other just one-time costs, it generated a optimistic modified EBITDA of $115 million all through the quarter, when compared to a reduction of $47 million a calendar year back.
3. It truly is a cryptocurrency participate in
Robinhood also features totally free cryptocurrency trades. Its cryptocurrency AUC rose from $414.7 million in 2019 to $3.53 billion in 2020, and skyrocketed to $11.6 billion in the initially quarter of 2021.
Throughout the 1st quarter, it created 17% of its complete profits from cryptocurrency transactions, compared to just 4% in the fourth quarter of 2020. Far more than a 3rd of that earnings came from Dogecoin (CRYPTO:DOGE), a single of its 7 supported cryptocurrencies.
Robinhood’s growing dependence on cryptocurrencies, particularly newer ones like Dogecoin, could be a double-edged sword. However, it also tends to make Robinhood a much more numerous and remarkable cryptocurrency participate in than Sq. (NYSE:SQ), which only backs Bitcoin (CRYPTO:BTC), and a safer cryptocurrency perform than Coinbase (NASDAQ:COIN), which depends solely on the unstable cryptocurrency industry.
4. The controversies will fade away
Robinhood is encountering tons of increasing pains. It was just lately fined $70 million by FINRA (the Money Field Regulatory Authority) around its incapacity to fill customers’ orders in the course of the Reddit-fueled trading frenzy and other shortcomings, and it faces additional lawsuits and likely laws.
However, I consider Robinhood can inevitably triumph over these problems. If it does, its standing for “democratizing” finance, simplifying investing, and disrupting conventional financial institutions could glow by way of, and make it one particular of the market’s most thrilling fintech stocks.
The key takeaways
I’m not saying I will acquire Robinhood’s IPO ideal away. If its first valuation is much too rich, I will wait for a pullback before nibbling on some shares. But it could nevertheless be the most enjoyable tech IPO of July if it arrives in just the future two months — and investors who focus on its fundamentals in its place of its controversies may well just notice it can be a fantastic very long-expression financial commitment.
This post signifies the feeling of the author, who may possibly disagree with the “official” recommendation posture of a Motley Idiot premium advisory services. We’re motley! Questioning an investing thesis — even one of our own — aids us all assume critically about investing and make choices that assistance us turn into smarter, happier, and richer.