Wednesday, July 28, 2021, was a disastrous day for Robinhood, the online brokerage. Company officials set its initial public offering at $38 on the NASDAQ board. They believed the value of the company was at least as high as $32 billion.
Unfortunately, traders disagreed. Price per share for the IPO tumbled by 10 percent that morning. The price went up a bit in the afternoon, but too little, too late. After selling over 52 million shares, the company was only able to raise $2.1 billion.
Background
Robinhood was founded by Vladimir Tenev and Biju Bhatt in 2013. They chose that name to send a message, summarized neatly by their motto: “Investing for Everyone.” Their ideal investors were young people who were just starting out.
The plan was simple. Offer investors with little money zero account minimums. Gift them with a few shares of stock. Enable them to buy fractional shares of expensive stock. Finance everything through revenue raised by a variety of means, including by membership fees, stock loans, interest on uninvested cash, and the sale of buy and sell orders from clients to high-frequency traders. Ultimately, each trade garners them a tiny profit. Those tiny profits add up. Everybody wins, according to this plan. New investors don’t pay anything out of pocket for their trading. The HFTs get their profits. And so does Robinhood.
The SEC
This practice, known as payment for order flow, is frowned on by the Securities and Exchange Commission. Pfof is being investigated for failing to provide the best price to investors. The SEC is alleging Robinhood did not disclose the practice to investors until 2018. Robinhood now makes full disclosure of its trading practices.
Robinhood also suffered from three outages in one week in March. Their online trading app shut down due to massive trading during those days. Slowdowns on the app recurred in June and August. Little customer service was made available to guide frantic traders.
Investors lost a lot of money by not being able to trade at those times. Investors have sued Robinhood. The SEC and the Financial Industry Regulatory Authority are looking into these events. Robinhood may be assessed fines.
GameStop Controversy
In January, ardent investors hyped GameStop stock in the “wallstreetbets” Reddit chat room. These fans of GameStop were calling out short-sellers of the stock using unpleasant words while urging one another to invest in the company. Which they did in droves. The stock’s price skyrocketed. Brokerages that were shorting the stock were hit hard by losses.
Stocks that rise that fast can also fall fast. As GameStop fell, Robinhood felt the repercussions. CEO Vlad Tenev announced they had to limit trading that day due to rising deposit requirements. They were also forced to hike required margins for trading. Angry traders looking for deals couldn’t buy as the stock price fell.
Counter Arguments
Robinhood is a 100-percent cloud-based company. Their revenues are based entirely on their reputation for handling large volumes of trade expeditiously. If they are to survive and thrive in this volatile economy, they must improve their infrastructure, which is exactly what they’re doing. Their platform is easy to use. With further technological advances, they’ll be able to scale it up with fewer problems.
Even with everything that has gone on this year, Robinhood has grown from 18 million users in the Q1 of 2021 to 22.5 million in Q2. Investing in the stock market is becoming popular with young adults. 70 percent of Robinhood’s users are Generation Y and Z investors. Robinhood’s customer base also includes much larger percentages of Hispanics and African Americans than other brokerages. These figures indicate a strong future for Robinhood, especially when one considers how many of their younger brothers and sisters will be coming of age this decade.
Recommendations
Robinhood’s stock was trading near $42 in mid-September, above its original IPO price. This fact reveals continuing strong interest by investors in the company.
Its growth since its founding has been impressive.
Even with continuing SEC investigations and some investor backlash to outages, this company has the potential for tremendous future growth.
About David Milberg
David Milberg is an experienced financial analyst and entrepreneur from New York City. Milberg is a proud father of three kids. Milberg graduated from Princeton University with a BA in History and graduated from Columbia University with an MBA. David currently serves as a Senior Vice President at Milberg Factors, Inc.
Over his tenure at Milberg Factors, David has also been involved in numerous not-for-profit activities. In light of David’s charitable work, he was honored in the year 2000 by the accountants and bankers division of Big Brothers Big Sisters of New York and by the Metropolitan Jewish Geriatric Foundation. David Milberg has also been active in the Lincoln Center Business Council.
David Milberg has invested in such major broadway productions as Mel Brook’s The Producers, The Weir, and the hit revival of Pippin directed by Diane Paulus and starring Tony Award Winner Patina Miller at the Leading Player. David sits on the Board of Trustees for The Prospect Theater Company and is a fervent supporter of the Lincoln Center Theater. David Milberg presently serves on the Board of Trustees of the Princeton Triangle Club, where he was Vice-Chairman.
David Milberg has a rich, varied background is musical theater and live stage performance.
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