Robinhood IPO: What You Need to Know (2024)

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).

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.