It’s more than a month since Robinhood (HOOD) debuted with its high profile IPO. The stock trading platform that took birth to democratize stock trading by making it commission-free and with no account minimums, Robinhood, has stayed in the headlines through this year, for various reasons.
For starters, the crescendo to July 29 did not scale up to anything big. The stock which opened at the lower end of the $38–42 band, dropped 8% to $34.82. The purists had their rationale for why it could not fare any better. We will visit that a few lines later.
For its landmark IPO, Robinhood earmarked over 25% for its retail investors, many of whom are seemingly first-time investors, a disruptive initiative, because retail investors seldom get first preference in IPOs. The move didn’t fire but that did not discourage the founders, Vlad Tenev and Baiju Bhatt either.
But post the first day’s lackluster trading, Robinhood stock has remained in the thick of things. To its credit, it has managed to attract a few big investments and the enthusiasm of retail investors, to quickly rise to a high of $70 on August 4, and since then has consistently stayed above $40. The valuation of the stock is soaring — over $40 billion!
What is sustaining the market price of the stock and is it good for the long term? We will look at what’s working and what’s not from a Robinhood perspective.
According to its listing on the US Securities and Exchange Commission, Robinhood has 18 million users funding accounts. One can expect most of them to be first-time investors, probably millennials, who are here because the Robinhood app is easy-to-use and allows them to dabble in stocks, exchange-traded funds, options and cryptocurrencies. They possibly have unconditional faith in Robinhood as a platform that will guide them to explore and make money big time. It is the potential of its collective customer base that is the goldmine for Robinhood.
What’s Not Working:
The fundamentals. Look at the 2020 financials. On a gross revenue of $960 million, the net revenue is $7 million, negligible for a valuation of $40+ billion. So, the value multiple is over 4,000X. Whereas competitors’ value multiples are around 20X.
Consider also the context of 2020, the year when much of the world’s young population worked at home, having the luxury of time and disposable cash to try their hand at a profitable pastime, stocks. Robinhood took the promise of multi-bagger returns and made stock trading as easy as ABC. As a pathfinder for these millennials, Robinhood demystified the stock markets, reflected their aspirations and took them on a trip down Wall Street, a la Pied Piper.
2021 is not the same. Work at home is out and workplace is in. Tight work schedules and commuting are back as priorities. So, chances of Robinhood adding huge percentages to its user base do not seem bright. And going forward years later, the work-from-home situation does not seem like it was in 2020. In other words, the margins in the coming years do not suggest Northward journey in a hurry. Just the reason why Robinhood is seen as a classic meme stock.
But all said and done, Robinhood has made an impact. The strong user base and the reputation of being an unrelenting disruptor, force the markets to keep the expectations high and correspondingly, the price as well. One can expect financial innovations from Tenev, Bhatt and company that can redefine paradigms to script another audacious growth story. The big news will be when this possibility becomes a strong reason for an attractive takeover.
But as of now, there is no basis for the euphoria, which continues unabated. Join in at your risk.