In Focus: The Robinhood IPO
Updated: Mar 19
The Robinhood IPO is getting closer to becoming a reality. The popular trading app filed its IPO paperwork with the Securities and Exchange Commission in late March.
A Robinhood IPO at one time seemed like a no-brainer investment idea. The company displayed rapid growth and was able to easily attract new stock market participants. In 2018, four years after starting, Robinhood hit 4 million opened accounts; E-Trade by comparison had 3.7 million accounts and had been in business for over 30 years.
Bad Timing Kills More Than Jokes
Not too long ago everything seemed primed for Robinhood to do nothing but succeed in the public markets, but the company continued to delay their IPO to their own detriment.
In 2019, Charles Schwab, TD Ameritrade, and ETrade all announced commission free trading on their platforms. This was a big hit to Robinhood's business model. Robinhood's commission free trading allowed the firm to attract customers that older more established Wall Street firms didn't want. By going commission less, Schwab and others declared that they now wanted those customers, and were willing to compete for them. People wondered at the time if Robinhood could thrive in an environment where it was no longer the disrupter, but the disrupted. An IPO during this time may not have worked out well for the company.
In 2020, the pandemic and being isolated at home brought a fresh new wave of money, traders, and success to Robinhood, but that would be cut short by the suicide of a 20 year old trader, who took his own life after mistakenly believing he had lost nearly $750,000 on Robinhood. The suicide caused outrage amongst many who accused Robinhood of gamifying the serious business of trading, which caused the young trader to dabble in trading practices he did't fully understand. The unfortunate suicide stopped any momentum Robinhood could've used to manage a successful IPO.
In 2021, Robinhood made the news for all the wrong reasons again, after cutting traders off from participating in one of the biggest trades of the new year. As the stock prices of companies like GameStop (GME) and AMC (AMC) were rising in early 2021, Robinhood investors were amassing fortunes, and big Wall Street firms who sold those stocks short were suffering massive losses. Robinhood put a pause on the purchasing of GameStop and other stock names that were rallying, and the timing of the event came across as if Robinhood was helping the big Wall Street firms catch their breath while screwing over their customers.
Ultimately what we came to find out was due to the excessive amount of trading in names like GameStop, Robinhood had a money problem and needed to raise capital. Because this wasn't expressed to the public soon enough, Robinhood became public enemy number one to its users and to people who didn't trade or invest in stocks in any capacity. (Here's Bill Burr's take on the GameStop Robinhood mess)
Robinhood has experienced enough to leave it beaten, battered, and bruised, but it is still standing, and that's likely because people hate change. The Robinhood Stock Traders group on Facebook remains very active as does the Robinhood communities on Reddit, even after the company was declared public enemy number one. This is why I strongly believe Robinhood as a public company will be a success over the long term.
I Go Waaaayyy Back
I have been trading since the times when you had to call a broker, speak to someone, and pay a hefty commission to trade. I've seen the business of discount brokerages start out very hot with dozens of companies and then dwindle down to a handful (Ever heard of Scottrade, Harris Direct, TradeKing, Sharebuilder, Olde?). The point is I've seen a lot of things on Wall Street, I've seen what many firms, full service and discount have to offer, and yet I often recommend Robinhood to people who are ready to take their first steps in the market. The reason why I do so is because of it's gamey nature. The app is very simple to use, and I think it does a good job of keeping things simple for beginners.
I've been an E-Trade customer since 2005, and I love what the platform has grown into, but for a newbie, it can be overwhelming. There's a lot of information provided by E-Trade to its users, and if someone just starting out only wants to open a trading account to get in on the GameStop move, an E-Trade or TD Ameritrade level account isn't necessary.
I believe the simplicity of Robinhood for first time investors is where Robinhood will win now. I also think if it can grow into a platform like E-Trade and TD Ameritrade, this will allow it to keep more of its matured customers over the long term, which should allow it to win in the future. And this aspect of the company shouldn't be underestimated.
New Money Over Here!
After the market's rapid rise from late March 2020 to the end of the summer in 2020, there was a fresh set of newly minted Robinhood millionaires and hundred-thousandaires who bet their unemployment and stimulus money on stocks and options that paid off big. Larger brokerage firms began to advertise to this new group of money wielders with features like wealth management and other things that Robinhood couldn't provide.
With Ethereum and Dogecoin's impressive runs, the market is set to mint a fresh set of millionaires, Robinhood will need to develop new features and additional trading and investment tools to keep that money from fleeing to other brokerage firms that offer more.
Do it, Do it Now...
We're several months past the GameStop debacle, and this provides a nice opening for Robinhood to go public before another major event breaks that's not in their favor.
As an investor, I love what Robinhood has been able to accomplish with the little that they offer. There is room to offer so much more like Pink sheet listings, bond trading, commodities trading, and/or IRA accounts to name a few. They could also expand their crypto offering, which I believe would bring even more people to the platform.
There is so much room to grow for Robinhood, and because of that it will be hard to ignore the company's stock on the public markets if the price is right.
The look of financial institutions is rapidly changing. People are securing mortgages and car loans on apps. Robinhood is just an investment app now, but with a few lines of code, it could become so much more (assuming they meet all regulatory requirements). Love them or hate them, Robinhood will be around for a long time, and I'm bullish about their IPO.