Here are the six cardinal things you request to cognize if you are reasoning astir buying shares of Robinhood Markets Inc. The archetypal nationalist offering priced Wednesday, and the shares commencement trading Thursday.
Robinhood, which operates a fashionable securities-trading platform, priced the shares astatine $38 each, the debased extremity of a range.
There are 3 bully things and 3 atrocious to cognize astir Robinhood, which volition beryllium traded connected the Nasdaq.
Let’s commencement with the 3 positives.
Growth is disconnected the charts
The app is chill and casual to use. So … maturation is amazing. Last year, Robinhood HOOD accounts grew 143% to 12.5 million, and gross surged 245%. That continued successful the archetypal quarter, erstwhile accounts roseate by 151% to 18 cardinal and gross accrued 309%, twelvemonth implicit year.
Detractors effort to usage this against the company, saying Robinhood’s interface turns investing into a game. But lone people, not an app, tin find if they attack investing arsenic a crippled oregon not.
Smart investors I cognize mention this arsenic a cardinal quality. They look for companies that get a foothold with customers and past turn by selling them much services. This is simply a halfway strategy astatine Robinhood. Its phenomenal maturation enactment the app successful the lives of tens of millions of young investors. They’ll request much fiscal services arsenic they get older and accumulate wealth, and Robinhood volition beryllium determination to provide.
This means things similar debit cards, recognition cards an enhanced level of work called Robinhood Gold, car loans, IRA and Roth IRA accounts, crypto wallets — and who knows what else.
It’s a disrupter
Half of each brokerage accounts opened successful the U.S. from 2016 to 2021 person been acceptable up connected Robinhood, the institution has estimated. That’s an awesome stat, fixed that competitors specified arsenic stalwarts Charles Schwab SCHW, +0.71% and Fidelity Investments aren’t precisely shabby. More than 80% of Robinhood’s clients travel by connection of mouth, different information constituent that tells you Robinhood is disrupting the brokerage world.
Investing successful disrupters including Amazon.com AMZN, +0.11% oregon Netflix NFLX, +0.08% tin wage disconnected big, due to the fact that disrupters thin to support connected uncovering caller ways to disrupt aft their aboriginal successes.
Like a batch of disrupters, Robinhood is founder-run. This is simply a positive for investors. Founders similar Jeff Bezos astatine Amazon are passionate astir their businesses, and they support innovating adjacent aft they person made their billions. Investors spell on for the ride. Robinhood was founded successful 2013 by Vladimir Tenev and Baiju Bhatt, and they inactive pb the company.
And now, the 3 negatives.
Retail investing whitethorn dilatory
Robinhood volition travel nationalist with a marketplace capitalization of $37 cardinal and an endeavor worth of $30 cardinal (market headdress minus nett cash), assuming it’s priced astatine $40.
This is simply a precise affluent valuation comparative to competitors similar Schwab and Interactive Brokers IBKR, +1.99%. True, Robinhood is increasing overmuch faster — 245% successful 2020 compared with 12% for Interactive Brokers and 9% for Schwab. To clasp the affluent valuation, Robinhood volition person to support up the accelerated growth. It’s not wide this volition happen.
“At a $37 cardinal marketplace cap, a batch of maturation is baked in. As radical instrumentality to the bureau and spell retired again and bash societal activities, we don’t cognize if trading is going to beryllium arsenic fashionable a pastime,” says Matthew Kennedy, elder strategist with Renaissance Capital, which manages the IPO speech traded money Renaissance IPO ETF IPO, +3.39%. “That is the large concern.”
True, but to immoderate grade a slowdown successful maturation is already partially priced successful to the stock. Robinhood has told investors to expect an outright diminution successful gross successful the 3rd quarter. Shares of Interactive Brokers person sold disconnected precocious connected anemic guidance, and Schwab was deed by this too.
Of course, the truly large hazard is simply a carnivore market. Not the benignant of little selloffs we person seen this year, but a nasty carnivore marketplace — the benignant that makes radical curse disconnected stocks forever.
Among brokerages, Robinhood would get deed peculiarly hard since overmuch of its gross comes from riskier areas of trading similar options (38%) and crypto (17%) that volition adust up the fastest. Of course, crypto has a beingness of its ain truthful it mightiness proceed to bash well, adjacent successful a carnivore marketplace and recession.
The question is whether Robinhood volition rotation retired capable different products to diversify gross distant from trading earlier the adjacent carnivore marketplace comes.
Regulators whitethorn ding the concern model
“Payment for bid flow” are the caller soiled words among Wall Street critics. Robinhood and different retail brokerages person replaced commissions with outgo for bid travel from marketplace makers similar Citadel Securities. They marque wealth by skimming fractions disconnected trades.
Critics deliberation this opens investors to abuse, and regulators are looking into it. “The hazard is regulators accidental ‘I americium taking distant 80% of revenue,’ ” says Kennedy. Robinhood gets astir 80% of gross by directing lawsuit trades to marketplace makers.
In my view, this exemplary is large for retail investors due to the fact that it lets them commencement positions gradually with tiny purchases, and mean down connected weakness. In the aged days, retail investors were much apt to conscionable by the full presumption successful the archetypal swipe to prevention connected commissions.
I deliberation the tradeoff is worthy it. Regulators whitethorn not agree. On the different hand, truthful overmuch of the brokerage assemblage present makes wealth from this practice, there’s a beardown lobbying contingent supporting it.
The Reddit assemblage trashes Robinhood
They’re aggravated astatine Robinhood for limiting trading successful the meme stocks AMC Entertainment AMC, +2.34% and GameStop GME, -5.28% erstwhile their spikes created recognition hazard successful the banal colony system, earlier this year. Robinhood constricted trading concisely to support the risks from rising, but it wasn’t the lone 1 to blame. The hazard managers down the clearance strategy hadn’t anticipated the brainsick moves successful stocks, either.
As influential arsenic the assorted Reddit trading groups tin be, truthful acold their negativity hasn’t wounded Robinhood. Second-quarter maturation was phenomenal.
In a July 27 filing, Robinhood said funded accounts grew 25% to 22.5 cardinal successful the 2nd quarter, from 18 cardinal successful the archetypal quarter. Robinhood besides enactment second-quarter gross astatine $546 cardinal and $574 million, a 129% summation astatine the midpoint from the $244 cardinal successful the 2nd 4th of 2020, and 7.3% sequential maturation implicit the archetypal quarter.
We should ne'er underestimate the powerfulness of the Reddit crowd. But besides retrieve that a batch of radical hated (and shorted) Facebook FB, +1.49%, Alphabet GOOGL, +3.18% and Netflix erstwhile they archetypal came public.
And look wherever their stocks person gone.
Michael Brush is simply a columnist for MarketWatch. He has a Robinhood account. At the clip of publication, helium had nary positions successful immoderate stocks mentioned successful this column. Brush has suggested SCHW, FB, AMZN, GOOGL and NFLX successful his banal newsletter, Brush Up connected Stocks. Follow him connected Twitter @mbrushstocks.