Is a Robinhood IPO coming soon? Robinhood has come a long way in accomplishing their mission to “democratize finance for all” since other founding seven years ago in April of 2013. That’s one reason we are watching this future IPO closely. Even the harshest critics can’t deny that the commission-free trading app (and website, but really, who uses the website?) has revolutionized the brokerage industry.
Industry brokerage firms like TD Ameritrade and Schwab (who will be finalizing their merger within the next three months), Interactive Brokers, ETrade, etc. are now offering free trades for online retail traders.
The critics have plenty of valid points. However, Robinhood’s customer service certainly leaves a lot to be desired, and the app is not effective for active traders. But when is there going to be a Robinhood IPO?
Before there can be a Robinhood IPO, a company needs to know how it is going to make money. Investors learned that lesson when the dot-com bubble burst in 2001. But if there are no fees, how does Robinhood make money?
We have learned through the “free” business models of Google and Facebook that if you aren’t paying for a product, you ARE the product. It’s no different with Robinhood!
They do make some money from their “Robinhood Gold” memberships, interest income from cash in users’ accounts, and from some of their new banking services.
It’s believed that at least 55% of their revenue comes from “order flow”; which is essentially Robinhood selling the orders from their platform to institutional trading desks.
Robinhood’s user growth has been exploding this year during the pandemic. They reached 1 million users in 2016, and had grown that to 6 million by October of 2018.
They added approximately 3 million in the first quarter of this year, and are over 13 million users today. These are mostly very small accounts, however. According to JMP securities, the average Robinhood account has only $1000 – $5000 dollars in it.
Perhaps a major reason Robinhood hasn’t had an IPO yet is because they’re still able to raise plenty of cash from the private markets.
They had a series F round in May that raised $280 million on a valuation of $8.3 billion, then announced another $320 million on July 13th with a valuation of $8.6 billion.
Make sure to check out our Robinhood review.
Another reason for a delay in a Robinhood IPO is the many issues that the company has had with the platform.
We’ve discussed in this blog in the past that Robinhood isn’t a very good platform for active traders like day trading on Robinhood. But just in case you missed those posts, I’ll quickly review here.
First of all, the order fills are slow and there are no hotkeys. This can hurt a trader fast if trading something highly volatile. They also have no phone number.
Customer service is handled via email only, and is often very slow in response times. A third issue with the Robinhood platform for day traders is the lack of advanced orders like OCOs or trailing stops.
Another issue that has since been resolved but remains a visible bruise, at least in my opinion, was around their mishap with paying interest on cash balances in their user’s accounts.
They initially said that the money would be SIPC insured. But the proper insurance would have been from FDIC. Robinhood has now fixed this issue, paying a paltry 0.1% on cash balances.
However the incident showed that management was going a little too fast and not getting into the details for their new offerings enough. Not a reassuring trait for a financial firm.
Probably the biggest issue that Robinhood must address is platform down time. Pretty much all of the brokers had platform issues during the extreme volatility in March.
But Robinhood’s seemed particularly egregious; perhaps because of the lack of customer service. Robinhood has experienced downtime on their platform several other times as well.
Nothing can be more frustrating for a trader to be losing money and not be able to do anything about it.
An emerging issue that will likely gain more scrutiny in the future is around unsophisticated traders losing large amounts of money.
They’re not really understanding some of the products they are buying and selling. This was very sadly demonstrated in June when a 20 year old Robinhood user committed suicide after seeing a negative $700,000+ balance in his account.
Robinhood is exploring ways to make sure traders understand the products they’re trading. This is done through education and stricter rules regarding margin levels.
As mentioned earlier, Robinhood was the main catalyst in the race to $0 commissions. But the OG discount broker was Charles Schwab.
Before the Securities Acts Amendments of 1975, broker fees were as high as $80/trade. With $0 commissions today on just about all online brokerages, it’s never been easier for Main Street to participate in the stock market.
We saw above that wide public participation in stocks isn’t necessarily always a good thing. Besides that tragic story, this spring has seen some other very strange occurrences in markets.
These are largely being attributed to Robinhood traders. There have been enormous gains in some sketchy stocks that have ranked high on robintrack.net; culminating in a 1500% rally in Hertz stock after it announced its bankruptcy.
The enormous sell off due to the coronavirus pandemic brought millions of new traders into the market, which may have helped it have the fastest 40% rally in history since the March 23rd low.
The extremes of the 2020 year market will be a history lesson for many years to come, and the way it worked out had many first time traders outperforming the largest hedge funds in the world.
The Robinhood app will certainly live up to its namesake if its users can keep that up! Which could be helpful in a Robinhood IPO.
Despite all of these issues, Robinhood can be a great broker for a new investor. There is a low barrier to get started investing for anyone and that is why they have been so successful. It”s perfect for one who just wants to buy a few shares of stock at time to hold for long term and grow an account over time. But what about the Robinhood IPO?
There was a lot of speculation that we’d see the Robinhood IPO this year, in 2020. However, with the year being the strangest ever, there’s yet to be any news as of late July.
It’s hard to imagine that they’ll continue to have the growth numbers they’ve been having lately. So they may be following in the footsteps of most of the high profile IPOs and wait until their best growth days are behind them before offering shares to the public. No doubt, when there finally is a Robinhood IPO, there’ll be trading opportunities.
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