Updated – 25.03.2021
Stock trading platform Robinhood may go public in the second quarter of this year, as the company faces increasing opportunities and challenges from the rapid growth of retail investing in the US.
Interest in the fintech leader’s plan for its initial public offering (IPO) has increased as retail investing has taken off. Robinhood added more than three million new users in 2020, bringing its total number of users to 13 million, the company said on its blog. Moreover, according to estimates from JMP Securities, only in the past month alone, January 2021, the platform welcomed another three million users.
In February 2021, the company’s CEO Vladimir Tenev told Congress that Robinhood had delivered around $35bn in realised gains to investors, suggesting significant growth in customers and customer assets. The average account size on the platform was around $5,000.
What do you need to know about Robinhood before it launches the IPO? When is the company expected to go public and what kind of valuation is it looking for?
What is driving interest in Robinhood?
The commission-free Robinhood mobile app, Covid-19 shutdowns, stock market volatility and government stimulus payments have all combined to attract a new generation of traders and investors.
Robinhood has made headlines in recent weeks as it was caught up in an historic social-media fuelled stock-buying frenzy focused on several stocks including GameStop (GME).
Several hedge funds that had shorted the stocks lost millions of dollars, prompting social media users to characterise the move as a battle between retail investors and Wall Street. Faced with a 10-fold increase in deposit requirements from clearing houses to cover settlement of the trades, on January 28, Robinhood temporarily suspended trading on those stocks and increased margin requirements.
The company said: “With individual volatile securities accounting for hundreds of millions of dollars in deposit requirements… we had to take steps to limit buying in those volatile securities to ensure we could comfortably meet our requirements.”
Robinhood has called for the securities industry to move from the current two-day settlement period for clearing trades to a real-time system. The period was shortened from three days to two days in May 2017, but the company argues that tying up funds while the trades clear “exposes investors and the industry to unnecessary risk and is ripe for change”.
The whole situation angered the platform’s users and prompted a Congressional investigation. Some investors questioned whether the controversy and PR damage would negatively affect the attractiveness and value of the potential IPO.
But recently, Greg Martin, co-owner and managing director of Rainmaker Securities, commented on the matter: “From a brand recognition perspective, who doesn’t know who Robinhood is? Despite some positive and negative press, everyone in the world knows who Robinhood is. They couldn’t have better free advertising.”
“With the amount of capital they now have, I expect the company will be the dominant brokerage going forward, and I think the market will acknowledge that. The valuation could be very large in the very near future which bodes well for an IPO.”
Public listing to increase Robinhood’s liquidity
A Robinhood stock IPO would give the company more flexibility to raise funding to respond to increased deposit requirements and customer demand in the future.
On February 3, the company said that it had raised $3.4bn, including $1bn announced on January 29, to support its record customer growth. The pre-IPO funding round was led by Silicon Valley venture capital firm Ribbit Capital and included investment firms ICONIQ Capital, Andreessen Horowitz, Sequoia Capital, Index Ventures, and NEA.
The $3.4bn was debt financing rather than equity, which would leave Robinhood’s market cap unchanged at $11.7bn, according to CNBC. A $660m funding round in September 2020 brought the total amount the company has raised from investors to $2bn, of which $1.25bn was received in 2020 alone, Reuters reported.
Robinhood was founded in 2013 by college roommates and entrepreneurs Vladimir Tenev and Baiju Bhatt, who initially sold trading software to hedge funds before building the company with the aim of leveraging technology to make trading more accessible. They named it after the English folk hero Robin Hood, who was known for “robbing the rich to give to the poor”.
Their mobile-first strategy led them to design a simple app with a fast registration process that attracted millennial investors who had previously not been involved in stock trading – the median age of Robinhood’s users is 31, according to the company blog.
The Robinhood app allows users to trade stocks and exchange-traded funds (ETFs), options, gold and cryptocurrencies, as well as offering an interest-paying cash account. Users can upgrade their trading accounts to its premium Robinhood Gold service to use margin. The $5 monthly subscription also gives users access to investing tools including Morningstar research reports, NASDAQ Level II market data and larger instant deposits.
Robinhood generates revenue from rebates on trades from market makers and cryptocurrency trading venues, Robinhood Gold subscriptions, margin interest, stock loans, interest on uninvested cash, debit card interchange fees, along with other fees, the company says on its website.
Down the line, there is potential for Robinhood to expand internationally. In July 2020, the company shelved plans for a UK launch “indefinitely” as it dealt with the influx of new users in the US. “Although our global expansion plans are on hold for now, we remain committed to opening access to financial markets for more people around the world,” the company said.
Robinhood IPO: everything we know so far
On March 23, 2021, the company confidentially filed a draft registration statement on Form S-1 with the Securities and Exchange Commission (SEC). The deal is being led by Goldman Sachs. The number of shares on offer, as well as the Robinhood IPO price range, was not disclosed. According to David Ritter, a senior analyst for Bloomberg Intelligence, the business could be worth as much as $40bn in an IPO, based on trading in the secondary market.
There is still a chance Robinhood could forgo the traditional IPO route in favour of a direct listing or a deal with a special purpose acquisition company (SPAC), as several technology companies have done in the past year.
The Robinhood IPO date has not been confirmed yet. Earlier this year, various sources suggested that the much-anticipated listing was scheduled for the second quarter of 2021. However, some now expect it to happen by the end of March. The stock will likely debut on the Nasdaq exchange.
It was also reported that the company was considering making a minority of the Robinhood shares on offer available to its users directly. While no final decision has been made, such a move would be unprecedented as retail investors usually do not have access to buying shares at the offering price.
Are you interested in investing in Robinhood stock as soon as the company goes public? Keep following Capital.com for the latest Robinhood IPO news to find out when Robinhood announces the details.
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You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
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CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.