Robinhood IPO Details

Robinhood Markets Inc. is an online brokerage company with a stock trading and investing app aimed at younger retail investors. The company, an early adopter of zero-commission trades, filed for an initial public offering (IPO), submitting an S-1 registration form to the Securities and Exchange Commission (SEC) on July 1, 2021. Robinhood previously filed a confidential IPO on March 23, 2021.

On July 28, 2021, Robinhood sold shares in its IPO at $38 per share ahead of its public debut on the Nasdaq on July 29, raising close to $2 billion. The company, which will trade under the ticker symbol HOOD, sold 52.4 million shares, valuing it at $32 billion, which was slightly lower than forecast.

A confidential IPO allows a company to submit an initial draft of its S-1 to the SEC, which only needs to be made public 15 days before any promotional roadshow or, if there's no roadshow, 15 days before the IPO. The advantage of filing confidentially is that the company has more control over its IPO date and can make changes to its IPO filing without needing to manage public relations.

On July 19, 2021, Robinhood released an amendment to its S-1 form announcing it would be selling 52.4 million shares and its founders and CFO would be selling another 2.6 million, for a total of 55 million shares. It also includes a greenshoe option for 5.5 million additional shares.

Robinhood's eponymous app lets users trade over 5,000 stocks and seven cryptocurrencies on its platform. In addition, users can trade in American Depository Receipts (ADRs) for 650 globally listed companies and options contracts for stocks listed on U.S. exchanges and exchange traded funds (ETFs).

Key Takeaways

  • Robinhood is a California-based fintech company with a stock trading and investing app targeted to younger retail investors.
  • Robinhood priced its shares at $38 per share on July 28, raising close to $2 billion, valuing the company at $32 billion.
  • Robinhood has raised a total of $5.6 billion from private investors and was reportedly valued at $40 billion at its most recent funding round in February 2021.
  • The company generated $522.2 million in revenue in Q1 of FY 2021 and reported net losses of $1.4 billion.
  • Robinhood was charged by the SEC in December 2020 with delivering subpar trade execution to its customers, and it has been in the news extensively in 2021 due to its popularity with traders involved in the GameStop short squeeze.

Robinhood Founding and History

Robinhood was founded in 2013 by Stanford graduates Vlad Tenev and Baiju Bhatt. The duo had prior experience on Wall Street before launching Robinhood, having previously founded Celeris, a trading technology firm, and Chronos Research, which sold fintech software to investment banks.

The Robinhood app was launched in April 2013 as an app for tracking stocks, in an attempt to create an equivalent of Yahoo Finance for mobile devices. Yahoo and Google Finance went mobile, pushing Robinhood out of that space, so Robinhood raised $16 million from well-known venture capitalists, including Andreessen Horowitz and Ribbit Capital, and pivoted to become a brokerage.

Robinhood as we now know it formally launched in Apple's App Store in December 2014. Since then, it has grown in popularity and its monthly active user (MAU) base had expanded to about 17.7 million as of March 31, 2021.

Robinhood has been in the news extensively in 2021 due to its popularity with the retail investors who carried out the GameStop short squeeze. Increased trading activity on its platform, however, led to rising demand for margin and the app halted trading activity for GameStop's stock on its platform. The company was also forced to raise additional capital from investors to meet its capital requirements.

That incident brought Robinhood under criticism and regulatory scrutiny, and its chief executive officer and co-founder Vlad Tenev had to testify before Congress concerning Robinhood's role in the controversy.

Robinhood Company Financials

Robinhood is a commission-free brokerage, meaning users do not have to pay fees to trade stocks on its platform. Trading fees have been the traditional way brokerages made money; in the absence of these fees, Robinhood has had to find other ways to generate revenue.

Robinhood's biggest source of revenue is from a practice called payment for order flow (PFOF). PFOF refers to money that brokerages receive for directing their customers' trades to particular market makers. Market makers are firms that match buyers and sellers of stocks or other securities. They make money by pocketing the difference between how much the buyer of a stock pays for the stock and the price at which the seller sells it. In order to ensure that there are always buyers and sellers to match up, they pay brokers like Robinhood to send them orders.

Brokerages are obligated to find the best execution of trades for their customers, which primarily means that they try to get the best price for trades in the most timely manner. PFOF presents the possibility for a conflict of interest because a brokerage may be paid more to send orders to a market maker who will give worse prices to their customers. Robinhood says it still gets the best execution for its customers, writing on its website that payments from market makers "aren’t considered when your brokerage orders are routed."

In the recently submitted S-1 form, Robinhood provided financial results for Q1 of its 2021 fiscal year, which ended March 31, 2021, and results for FY 2020, which ended Dec. 31, 2020. The company generated $522.2 million in revenue in Q1 FY 2021, more than quadrupling on a year-over-year (YOY) basis. However, Robinhood's net losses ballooned, rising to $1.4 billion in Q1 2021 from $52.5 million in Q1 FY 2020. For FY 2020, annual revenue grew 245.5% to $958.8 million, helping the company generate a net income of $7.4 million compared to a net loss of $106.6 million the previous year.

Nearly 81% of Robinhood's revenues in Q1 FY 2021 were transaction-based revenues, generated from PFOF, including what the company calls transaction rebates on cryptocurrency trades. About 12% of total revenue was from interest, either charged on margin accounts or from putting customers' uninvested cash in bank accounts and keeping the interest. Finally, close to 8% was generated from other sources, such as subscriptions for Robinhood's premium Gold membership, which allows users to trade on margin.

Robinhood's net cumulative funded accounts, a key metric that gauges the number of accounts into which users made an initial deposit or money transfer during a specified period, rose 150% YOY to 18 million in Q1 FY 2021. The company's total book value, the difference between its assets and liabilities, as of the end of the first quarter, was $6.2 billion. Total cash and cash equivalents on Robinhood's balance sheet at the end of the quarter were $4.8 billion.

On July 19, 2021, Robinhood released preliminary estimated financial information for the quarter ending June 30, 2021. Because they were preliminary, all numbers were given as estimated ranges. Robinhood's revenue was between $546 million and $574 million, its net losses were between -$537 million and -$487 million, and its estimated number of net cumulative funded accounts was 22.5 million. If that estimate is correct, it would be a substantial increase even over its Q1 numbers, much less its YOY numbers. However, it is unclear how much of the boost is a temporary uptick due to the popularity of trading in meme stocks or a longer-term trend.

Robinhood Key Financials
  Q1 FY 2021 Q1 FY 2020
Revenue ($M) 522.2 127.6
Net Loss ($M) 1,444.8 52.5
Net Cumulative Funded Accounts (M) 18 7.2

Source: Robinhood S-1

How Much Is Robinhood Worth? 

According to online public database Crunchbase, Robinhood has raised a total of $5.6 billion from investors over 24 funding rounds. The most recent round on Feb. 1, 2021, raised $2.4 billion. Robinhood was valued at $40 billion at its February funding round, substantially higher than the $11.7 billion valuation from its September 2020 round. Among its major backers are Kleiner Perkins, Andreessen Horowitz, and Google Ventures.

Robinhood's Founders, Tenev and Bhatt, hold 54.4 million and 80.2 million shares, respectively. After selling about 1.3 million shares each, they have 26.3% and 39% of total voting power over the company due to their control of the company's B-shares, which carry much greater voting power than common shares.

At its IPO price of $38 a share, Robinhood has a valuation of approximately $32 billion.

Additional Company Details

One notable factor that could complicate Robinhood's IPO is Securities and Exchange Commission (SEC) Chair Gary Gensler's current focus on reviewing PFOF as a practice. He announced on June 9, 2021, at a conference that the SEC was investigating the role market markers play in the structure of the stock market as well as the role of PFOF.

This is more salient because Robinhood has already been in trouble for not delivering best execution on its orders. In December 2020, the SEC found that "Robinhood falsely claimed in a website FAQ between October 2018 and June 2019 that its execution quality matched or beat that of its competitors. The [SEC's] order finds that Robinhood provided inferior trade prices." The SEC said that this practice cost its customers $34.1 million, even when accounting for the savings customers gained by not having to pay commissions. Though Robinhood did not admit to or deny the SEC's filings, it did agree to pay $65 million to settle the charges.

However, the SEC has not announced any specific changes or reforms based on this review.

The Bottom Line

Online brokerage firm Robinhood offered its stock Nasdaq exchange under the ticker "HOOD" for $38 a share. The company is selling upward of 57.9 million, with its founders and CFO selling another 2.6 million shares between them. The company expects to raise roughly $2 billion from the IPO, rising to $2.3 billion if the underwriters exercise their greenshoe option.