Why is Robinhood’s IPO pricing for the US Internet celebrity brokerage cold?

The initial public offering of Robinhood, the favorite stock trading platform of American retail investors, “is cold,” and the issue price is set at the lower end of the guidance range.

According to a Bloomberg report, Robinhood, a free retail brokerage firm AOL, set its IPO stock price at $38 per share, at the bottom end of the guidance range of $38 to $42, and plans to raise $2 billion.

The pricing will make Robinhood valued at 32 billion U.S. dollars, last September the company’s valuation in the primary market was 11.7 billion U.S. dollars.

Robinhood is scheduled to go public on the Nasdaq on Thursday and is one of the most watched IPOs in US stocks this year.

Prior to this, Robinhood announced its US stock IPO prospectus on July 1, seeking to list on the Nasdaq under the trading symbol “HOOD”, with Goldman Sachs and JPMorgan Chase Securities as underwriters.

The prospectus shows that Robinhood Markets will issue 52.4 million Class A common shares, and the company’s founder and chief financial officer will sell an additional 2.63 million Class A common shares in the initial public offering. The proceeds from this financing will be used to repay borrowings, working capital, capital expenditures and general corporate purposes.

An unusual IPO

Robinhood stated that its long-term mission is to lower the barriers to entry into the financial world, and this IPO is also practicing this concept.

Robinhood plans to leave no more than 35% of the shares in the IPO to its own users, with a total of no more than 18.3 million shares. The company’s chief executive officer Vlad Tenev said he expects this to be one of the largest retail stock placements in history.

Generally speaking, most of the new IPO shares will be allocated to institutional investors or high-net-worth individuals. Retail investors usually have no way to buy these shares before the newly listed company starts trading on the exchange, so they missed the opportunity of the first wave of stock price rise .

However, some analysts said that excessive retail placements may cause unexpected fluctuations in Robinhood’s stock price.

Greg Martin, managing director and partner of Rainmaker Securities, said in an interview with CNBC that retail investors are fickle, and the more Robinhood sells to them, the more susceptible they are to super runs on Reddit forums.

Robinhood’s lock-up period is also unconventional. After the company goes public, employees can immediately sell 15% of the shares, while the traditional lock-up period is 6 months. After three months, investors can sell another 15%.

Perhaps these extraordinary operations have caused some institutional investors to stay away from Robinhood’s IPO.

David Erickson, a professor of finance at the Wharton School of the University of Pennsylvania, said that investment banks generally don’t like the freshness of the IPO process. In the case of rising.”

Retail favorites

As a pioneer in zero-commission trading in the United States, California-based Robinhood pioneered the commission-free trading of stocks, forcing the retail brokerage industry to collectively cancel commissions in 2019. D1 Partners, Sequoia Capital, Kleiner Perkins and Google Ventures Group GV are among the shareholders. Robinhood provides trading of stocks, cryptocurrencies and options, as well as cash management accounts. Most of the user transactions are free.

Since the epidemic, retail transactions in the United States have been active, and Robinhood has increased its users at an alarming rate and far surpasses competitors in the same industry. According to the updated prospectus, Robinhood estimates that as of the second quarter, the company has 22.5 million capital accounts (that is, accounts linked to bank accounts and making payments), which is higher than the 18 million in the first quarter of 2021. An increase of 151% over the same period last year.

Robinhood said that about half of users are first-time investors, with a median age of 31 and a median account size of only $240. The average account size in February was $5,000. As of the end of March this year, the company has $12 billion in cryptocurrency assets.

Calculated by the number of fund accounts, Robinhood is the world’s third largest brokerage, second only to Fidelity and Charles Schwab.

Robinhood’s IPO pricing means that the valuation of each funding account is about $1,350, which is much lower than peers. Analysis by MKM Partners shows that each account of E-Trade is valued at US$2,500, and each account of TD Ameritrade is valued at US$2,200.

Financial data: rapid revenue growth, loss of 1.4 billion US dollars in the first quarter

Financial data shows that Robinhood’s revenue is growing rapidly thanks to the boom in retail stocks during the epidemic. Total revenue in 2020 is US$959 million, which is more than three times the total revenue of US$278 million in 2019. Revenue in the first quarter of 2021 is US$522 million, which is more than four times that of US$128 million in the same period of the previous year. In theory, the company’s revenue this year is expected to exceed US$2 billion. In the updated prospectus, Robinhood estimated its revenue for the second quarter to be between US$546 million and US$574 million, up from US$244 million in the second quarter of 2020.

Options trading accounted for approximately 38% of Robinhood’s revenue, and stocks and cryptocurrencies accounted for 25% and 17% of revenue, respectively. But Robinhood warned that as the retail trading boom cools, the brokerage’s trading revenue and account growth may slow.


In terms of profitability, Robinhood expects a net loss of US$487 million to US$537 million in the second quarter, while the company achieved profitability in the same period last year. The company suffered a loss of US$1.4 billion in the first quarter of this year, far exceeding the loss of US$53 million in the same period last year . This is mainly due to the retail vs. institutional short-squeeze war in January that made Robinhood financially strained. The clearing house’s increased capital requirements forced it to suspend trading in some popular stocks. In February, it raised $3.5 billion in debt financing and caused a quarterly loss. The net income for the full year of 2020 is USD 7 million.

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