Robinhood’s $ 40 billion IPO, explained

Robinhood has a wild 2021.

The trading app – founded in 2013 to “democratize finance” – has empowered a whole generation of retail traders.

These traders overwhelmed the app during the Reddit-fueled GameStop frenzy earlier this year. Just to keep the lights on, Robinhood had to raise $ 3.5 billion in emergency loans.

Well Robinhood survived

And – last Thursday – it officially filed its S-1 paper for an IPO, with the intention of trading under the symbol $ HOOD. Through CNBC, it is experiencing significant growth:

  • Funded accounts reached 18 M against 7.2 M in March 2020 (+ 151%)
  • Assets in custody are $ 80 billion compared to $ 19.2 billion in March 2020 (+ 417%)
  • Returned reached $ 522 million in Q1 2021 compared to $ 128 million in Q1 2020 (+ 309%)

Over 60% of its sales ($ 331 million) come from Payment of Order Flow (PFOF), where Robinhood directs transactions (eg stocks, options) to market makers like Citadel Securities.

While a common practice on the stock market …

… PFOF is criticized for its “lack of transparency”. It’s not the only part of Robinhood’s business that’s under the microscope.

The startup paid a record fine of $ 70 million to the US financial regulator FINRA per day (!!!) before filing its IPO papers.

FINRA says Robinhood has caused “significant harm” to its clients, including allowing risky trades (via options) and misleading information about other trading tools (margin loans).

Robinhood on track for more than $ 2 billion in sales for 2021

That’s more than double the take last year and a driving force behind a potential valuation of $ 40 billion +.

Robinhood does note, however, some interesting risks to its business outlook:

  • Class actions related to actions taken by the startup to restrict trade during the GameStop episode (federal authorities seized the cell phone of Robinhood CEO Vlad Tenev in a related investigation).
  • Dogecoin – the crypto asset itself – accounted for around 6% of the company’s revenue in the first quarter of 2021. Robinhood could take a hit “if dogecoin markets deteriorate” in fact in S-1).

Like we said: Robinhood has a wild 2021.

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