A lot of us are expecting a Robinhood IPO in 2021…but will it happen? Today, I’ll
take a look at what we know so far and why this looks to be the year Robinhood goes public.
Welcome to the Healthy, Wealthy, and Wise channel where we focus a lot on IPOs. In fact,
in December we had a preview of 7 companies that we expected to come out in early 2021
and as of right now, 3 of them went public last week and 2 more are set to go public
in February. And that’s not to mention that every week, we have our featured, IPO This
Week episode where we talk about ALL the companies that we know are going public for the upcoming
seven days…it’s really just a great way to stay up to date on all the IPOs coming
out. Now today we'll be focusing exclusively on Robinhood, a company that has been rumored
to go public for the last couple of years, but now, based on a lot of factors and reports,
an IPO seems more imminent than ever and I'll share some of those reasons with you. Now
for many of you, you’ve been with me for awhile, and as always, I want to thank you
for always sticking with me. And for those of you here for the first time, my name is
Kevin. And if you’re into staying on top of all of the companies hitting the market,
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they come out. Now please keep in mind the information in this video is meant to be informative
and any opinions I share are completely my own, and therefore, this video should not
be viewed as providing financial advice...you should always do your own research or consult
with your own financial advisor when making any investment decision.
So today, I wanted to share some information on a company that a lot of people in the community
have asked about going public and that, of course, is Robinhood. And it makes sense,
because a lot of you use the platform yourselves, like it, and of course, a lot of people just
like the idea of investing in a company that they use and find value in. But they also
see the company as one that has a lot of growth ahead of it, fueled by a younger demographic
leading the charge, particularly millennials. The company has made CNBC’s disruptor list
multiple times and with good reason…. they’ve helped revolutionize online trading by not
charging commissions which has led to many other brokerages to follow suit. Impressively,
with their over 13 million accounts, Robinhood has muscled their way in less than a decade
to make household names like Charles Schwab, Fidelity and Vanguard completely adapt to
their commission-free pricing model. While a Robinhood IPO would not likely be
one of the biggest money deals for a possible 2021 offering, it could be one of the most
sought after ones. At this time there are still a lot of unknowns about an offering,
but there are definitely a few things out there that have been reported that lead to
a likely IPO of Robinhood stock happening this year.
Let’s talk valuation and how the hot market environment has powered it up. As the company
benefitted big time from the pandemic, adding about 3 million accounts in just the first
quarter of last year alone, Robinhood looked to capitalize on the boon to their business
by holding some fundraising rounds last year. Over the summer, David French in Reuters reported
that the company had raised 660 million dollars during the most recent round, which raised
the company’s valuation to 11.7 billion dollars as of September, up from a valuation
of 8.6 billion dollars from another round of fund-raising just a couple of months earlier.
And in that same article, it was estimated that Robinhood had raised a total of 1.25
billion dollars in 2020 alone. With business good from a booming stock market and investors
eagerly coming onboard in the private markets, for those reasons alone, the timing for a
sooner-than-later Robinhood IPO makes total sense.
And piggybacking on top of that, we’ve also had Reuters publish another article in December
reporting that Robinhood had settled on Goldman Sachs to lead its preparations for a 2021
IPO, although that was qualified by a common statement of a Robinhood IPO date being ‘subject
to market conditions’, so no definitive time table was given other than saying the
expectation was for it to happen this year. Also in that report, sources reported that
the value of the company at the IPO could be around 20 billion dollars, which would
be almost double to where it's currently valued. As they say, strike while the iron is hot.
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Alright, let’s get back to Robinhood. So before I talk about another report why Robinhood
stock should be publicly available in 2021, which also happens to be the most recent one,
I think it’s important to talk about some of the headwinds against the move, or things
have likely slowed them down. Now Robinhood has had its share of issues in the past, including
things like their outages last March, a botched attempt to launch new checking and savings
products in 2019 that brought in regulators, data breaches in the past year, and the negative
PR of a young trader killing himself last summer due to a lack of clarity of his actual
account balance. But today, I just want to mention the more recent ones that may have
impacted an upcoming Robinhood IPO. A couple of the big ones were summarized nicely
in an article by Avi Salzman on Barron’s in December. The first issue was the secretary
of Massachusetts suing the company with accusations of it violating the state’s fiduciary rule,
which says that brokers owe a duty of loyalty to their customers. The complaint said that
Robinhood enticed inexperienced investors to make risky trades so it could profit off
trade execution. These claims against Robinhood aren’t new, but the formal lawsuit in place
saying that the company doesn’t care about its users isn’t optimal to have to deal
with when preparing to go public. Robinhood has denied the allegations and said it planned
to vigorously defend itself. While the charges could be hard to prove as mentioned in the
article, what could be problematic from a legal sense are claims that Robinhood ignored
its own options-approval rules. Not following your own rules or policies is always a target
for regulators. The company responded that it has since “made significant improvements
to our options offering, adding safeguards and enhanced educational materials.”
So that's one headwind. The other one in the article was news on Robinhood settling SEC
claims that it had misled customers about how it makes money. Reportedly and I’m reading
this directly from the article,” the SEC said that from 2015 to 2018, Robinhood was
more focused on getting large payments from market makers than on getting good trade execution—so
much so that the poor prices its clients got sometimes completely outweighed the benefits
they received from free commissions.” As typical in settlements, Robinhood didn’t
admit to or deny any wrongdoing, but did pay $65 million to settle the case.
Now the issue here is the basis of how they were able to disrupt the market and offer
trades commission-free in the first place and still make money. What Robinhood does
is pay for order flow, which is a legal practice that involves taking a cut of the profits
market makers earn by executing Robinhood client trades. According to Salzman, other
brokers also make money this way, but tend to rely on it for much less of their revenue.
At Robinhood, it makes up the majority of revenue, up to as much as 80% of it while,
as a comparison, at Charles Schwab,that number is 2%.
While paying out 65 million dollars can’t really be seen as a positive, what is, is
that this SEC issue is no longer hanging over them so they can put it in the past and move
forward with their IPO. Now one other interesting piece of information
from this article, particularly when you start wanting to get an idea of where the company
should be valued at, is that while Robinhood doesn’t disclose revenue or profits, securities
filings indicate that the company made less than $1 billion in revenue last year, and
may fall short of that number this year. As quoted from the Barron’s article, when asked
earlier this year if the company is profitable, the Chief Financial Officer said that Robinhood
was “investing heavily in our company, so our costs are going up quite a bit, along
with our revenues, as we grow.” Now public perception aside, the bigger consideration
going forward is how can Robinhood grow revenue beyond order flow? Whether the process gets
more regulatory scrutiny or not, the company needs to diversify in other ways to make money
where they don’t alienate their customers that have come to them primarily for the low
costs by starting to charge fees. My guess is instead of doing that, they will look at
adding more features or personalized consulting services going forward. Since many of their
account holders are new to investing, coming in after the market crash in March and have
yet to significantly deal with dropping prices, these kinds of services could prove popular
once a significant correction occurs. Right now, many new investors are feeling pretty
good about themselves because things have been great overall in the market for the past
10 months, but that will be tested when that correction comes. And it will, you just never
know when. I can tell you I felt the same way in the late 90’s. But after the bubble
burst, many people got out of the market after taking big losses and didn’t come back.
While I was lucky to not take any big losses myself, the experience definitely definitely
made me more cautious and gun-shy on pulling the trigger on individual stocks. What Robinhood
can’t afford to happen is have a significant portion of their core demographic leave when
the next downturn happens. And premium support services might be the answer, helping the
company generate additional revenue and keeping their account holders on the platform.
Alright, so let’s get to another piece of evidence that there will be a Robinhood IPO
this year…and this is the most recent one as of this recording. Now I want to preface
this evidence by saying if you’ve watched me in some of my live streams, I’ve said
that of all companies, I believe Robinhood is the one that should go public by a direct
listing. I mean here’s a company that was founded to basically give a middle finger
to the established players in the industry. And it has the name 'Robinhood' of all things,
a character known for robbing from the rich to give and help the poor. If Robinhood were
to go public with a traditional IPO, we could expect to see the same story play out that
happened with Snowflake and Airbnb; the big institutional investors on Wall Street would
buy all the IPO shares at one price, and then the next day, be able to sell them to ordinary
people for more than double the price they paid for their shares of Robinhood stock.
How un-Robinhood-like would that be? Now the issue until recently was that with
direct listings, a company couldn’t raise new capital, and that’s something that Robinhood
was obviously looking for. However, that can now happen as the SEC recently approved a
rule change that now allows companies to have the ability to raise capital at a direct listing.
Now keep in mind this has yet to be done by another company, so there’s always a hesitation
in doing something first without having an idea of how it will go in the real world,
but hey, this is the Robinhood that went into the unknown of not charging commissions on
trades, right? Now they also have the option to do what Roblox is doing, which is go with
a direct listing after holding another private round of fundraising. But at this point there
is no indication that Robinhood is looking to explore the direct listing, which as I
just mentioned, they’ve already selected Goldman Sachs to lead a traditional IPO.
Alright forgive me for my rant, now to the actual news. In an article on Bloomberg written
by Matthew Monks and Scott Deveau on January 7th, it was reported that Robinhood was considering
selling some of its shares directly to its own users when it goes public this year. Now
that’s significant; and a way for the company to help save the disruptor reputation that
I was just saying that might be tarnishing by holding a traditional IPO.
Now the article does say it would be allocating what they call “a significant minority”
of the shares it will list to its own clients. But the authors also note that no final decision
has been made on how much stock it might sell to its own customers, or if Robinhood will
even proceed with the plan. If this were to happen, it would be huge,
as a portion of their own account holders could actually get Robinhood stock at the
IPO share price, which as I've said many times is difficult for retail investors to get a
hand on. Obviously if this does happen, the devil will be in the details so we need to
see what they put into their S-1 filing to figure out how much of a game-changer this
could be. When that filing comes out, I’ll definitely dig into it and put up another
video on what information is in there that you'll want to know.
The last juicy part of that article was that a Robinhood IPO could, again could, come as
soon as this quarter, another piece of evidence that they are likely to go public this year
of 2021. If that is the case, then we should start hearing reports of Robinhood filing
confidentially soon, which as of yet, I’m not aware of that happening. But as soon as
I do hear something, I’ll definitely share it with you…if you don’t want to miss
it, remember to turn your notification bell on.
So what do you think? Are you in on a Robinhood IPO no matter what? Or do you still need more
information before making that leap? Let us know what you think in the comments.
It'll be exciting to watch the journey of Robinhood investors being able to trade Robinhood
stock on the Robinhood platform... And I'm looking forward to helping cover that journey
with you... so yeah, there'll be more to come. But for now, if you enjoyed this video, please
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Until next time, thank you for watching, and have a great day!