In Focus: The Robinhood IPO Pt.II
Updated: Aug 2, 2021
In 2012 a company the entire world was waiting on to go public finally did. It priced its IPO at $38 a share and went public on May 18 of that year, and out of the gate it was a dud.
The stock would trade downwards over the next 16 weeks falling below $20 a share. Again, this was a company a large portion of the investment community was waiting on to go public. Many expected the stock to go to the moon right out of the gate, but it didn't. 22 weeks after the IPO, the stock started to catch its footing and would go on a massive run upwards. That company was Facebook (FB), and the stock price now is $365.30 per share.
This week Robinhood (HOOD) went public at $38 per share and it wasn't a great outing. The stock currently trades at $35.15 as of this writing and there has been a lot said about Robinhood and its IPO. At its IPO price Robinhood was valued at $35 billion, and that may have turned some investors off. At $35 billions Robinhood would be more valuable than American Airlines (AAL) ($13 billion) and United Airlines (UAL) ($15.6 billion) combined, and more valuable than America's number one pure play grocer Kroger (KR) ($30 billion). Robinhood has value, but investors weren't convinced that $32 billion was it, and for good reason.
In Robinhood's S1 filing it noted 18 million accounts with $81 billion of assets under custody. In 2020 Morgan Stanley (MS) paid $13 billion for E-Trade, which had only 5 million accounts but $360 billion in assets. Looking at it that way, the numbers don't add up for Robinhood.
Then there's the payment for order flow issue. It's the reason why Robinhood can offer commission free trading and the reason the company became public enemy number one earlier in the year. Never forget, Ted Cruz and Alexandria Ocasio-Cortez were concerned and on the same side on the same issue, and the issue revolved around Robinhood.
There's a belief that there are major changes in the works around payment for order flow, and that the practice could be banned in the U.S. as it is in the U.K. In Q1 2021, more than 80% of Robinhood's revenue came from order flow. If the practice were to be banned, that would be a massive hit to Robinhood, and the company would be a shell of its former self, and may not be able to survive without being acquired.
When Robinhood's IPO price started to make the news, I asked myself why does Robinhood's founders and its underwriters believe it's a $30 billion company? Then I remembered, it's because it's tech, and in this day and age investors are overpaying for "tech." Don't believe me, compare GM (GM), Ford (F), and Tesla (TSLA), an $82 billion
company, a $56 billion company, and a $680 billion company respectively. In 2019 GM delivered 2.8 million vehicles, Ford sold 2.4 million vehicles, and Tesla delivered 376,000 vehicles. GM and Ford have long been considered automobile manufactures, but Tesla, Tesla is a tech company that makes cars, like Apple (AAPL) is a tech company that makes phones and Netflix (NFLX) is a tech company that leases, produces, and displays content. In the old days, Netflix would be a broadcast company or a movie studio, but today it's a tech firm, so we'll pay 53x earnings to own it over the 9x earnings to own ViacomCBS (VIAC), a simple broadcast company.
Since around the time of 2012, it didn't matter what a company did, what mattered was what box we put the company in, and this is why Robinhood's stock will be a winner in the end.
Remember E-Trade was acquired for $13 billion dollars, and while it offered everything Robinhood does and more, it was considered a discount brokerage firm, not a tech firm and not a FinTech, just a plain old boring brokerage. Same for TD Ameritrade, another company with more assets ($1.3 trillion) but less accounts (12 million) than Robinhood. TD was acquired by Charles Schwab (SCHW) for $26 billion, and like E-Trade, TD offered everything Robinhood offers and more, but it wasn't considered tech. That simple four letter word, "tech" makes all the difference in how Wall Street values a company.
For Robinhood, unfortunately, their tech isn't as free to grow as "tech" in some other industries. Robinhood has major regulations to abide by that prevent it from spreading its wings as far as it wants to. Remember how long it took the company to get its cryptocurrency purchasing arm online and how long it took the company to offer debit cards to its account holders. Being a steward of the public's money comes with serious restrictions, and Robinhood has to balance that with the tech attitude of go fast and break things.
There are issues, but I'm still a believer in Robinhood and it's primarily because of its social status. The company is everywhere, good news or bad news, Robinhood always seems to find its way into an important timeline or news feed.
While many of us, myself included, tend to harp on the GameStop debacle that Robinhood created, there was a lot of good happening on the app before they halted trading on GameStop and other meme stocks that week. Before the halt, regular people were making big money, and enticing others who had never thought about investing before to join in. Those new investors signed up to Robinhood, because that's the user interface they saw on their timelines. When people see +$10,000 of total returns on a green and white background, they're not going to go and open a WeBull or Public account, they're going to open a Robinhood account.
As bad as the GameStop debacle was at the time, and as much as people say they're still upset about it, people are still using Robinhood and finding their way to Robinhood. When the next meme stock takes off, it will only attract more people to sign up to the platform.
Assuming that the government does nothing about payment for order flow (which I don't think they will), Robinhood's best days are ahead of it. For many young companies, investors who buy in at the growth stages have little to no idea what the destination is for the company. When Netflix was delivering DVDs, we didn't know it would transition into a streaming giant. We didn't know the iPod would turn into the iPhone or that Google search would turn into Google Maps, Google Docs, G-Mail, and Android, or that Musical.ly would turn into Tik Tok, but we know exactly where Robinhood can go.
Robinhood has to grow into the "tech" version of E-Trade and TD Ameritrade. It also has to convince its 18 million users to not leave for better platforms when those customers build up their accounts. There is still this idea that having $5,000 in a Robinhood account is okay, but $50,000 needs a better place to rest, and Robinhood has to tackle that kind of thinking. That's the goal for Robinhood, that's what you're hoping for if you're a Robinhood investor now, that the company will continue to expand its offerings, grow its customer base, keep more of its users than it loses from quarter-to-quarter, and hopefully be properly funded so that it can be on the right of history when the next GameStop comes around, and it will come around.
Since the Facebook IPO, I've been attracted to big names with slow starts out of the gate and Robinhood fits the bill. Over the past few years I've done well grabbing Corsair (CRSR), Palantir (PLTR), and Slack (CRM) after their not so spectacular debuts, and all have performed great. What I learned watching Facebook is that professional money managers are like kids, they like it if someone else likes it, but no one wants to say they like it first. Robinhood definitely has its issues, but hey, it's tech.