The opening price has been set at $38 and Robinhood Markets Inc. (NASDAQ: HOOD) has committed to sell 20% to 35% of its shares to users. The target valuation is $33 Billion. Is it accurate? Let’s take a deep dive into the numbers to find out.
Robinhood has 22.5 million users. Their revenue for the first quarter of 2021 was $522 million, up 309% from the same period the year before. They used a growth multiplier of 26x when calculating their valuation. That’s comparable to what TD Ameritrade did in 1999.
It’s possible, but most financial analysts feel that it’s not realistic. TD Ameritrade had a significantly different revenue model, one that did not rely on payment for order flow (PFOF) like Robinhood does. This is an apples-to-oranges comparison.
PFOF is under fire from government regulators. SEC Chair Gary Gensler called it an “inherent conflict of interest” back in June. David Trainer, CEO of New Constructs, stated, “This IPO is effectively selling investors on exploiting other investors.” That’s a red flag.
Measuring the Meme Stock Effect
Democratizing financial markets is an admirable mission, but it comes with its fair share of volatility and drama. Back in January, Robinhood had to shut down trading during the WallStreetBets short squeeze on GameStop. Those traders are still on their platform.
Putting almost a third of their public stock into the hands of the masses may come back to bite them. Despite its altruistic name, Robinhood does not have a great reputation for treating its customers well. They were recently fined $70 million for causing “significant harm.”
The company did release a statement this week warning investors of potential “meme stock volatility” in the opening days of their public offering. The question is, “Where will the price settle when the initial storm passes?” It’s a good bet it won’t be over $38.
Reliance on Crypto Trading Could be a Problem
Robinhood launched its crypto unit in 2018 and users got to experience the thrill of the Bitcoin explosion in 2020. Unfortunately, the next big crypto boom was a bust for the company. Problems with volume trading of Dogecoin and Ethereum have plagued them in 2021.
Despite that, 34% of Robinhood’s revenue in Q1 of 2021 came from Dogecoin, while 17% of transaction-based revenue was generated from crypto trading. That’s positive if the crypto industry maintains the status quo, but recent mining bans in China have the sector on edge.
Coinbase, Robinhood’s closest competitor in the crypto trading space, launched its IPO in April with a $50 million valuation. Their reference price at the opening was $250 and it spiked 52% out of the gate. It’s fallen since, trading at $241 as of July 30th.
Is there a Bullish Outlook for Robinhood?
CNBC’s Jim Cramer, in a recent interview on Squawk Box, called the Robinhood IPO “the toughest one he’s ever seen.” He highlights the risk involved but also comments on the momentum that Robinhood has in their favor.
Robinhood CEO Vlad Tenev wanted to set the price at $30, but Goldman Sachs felt that $38 was the right number. Their analysts are some of the best in the business, so there’s one argument on the bullish side. The Goldman team feels the stock will go up.
Earlier this year, Robinhood started offering “pre-IPO pricing” to its users. Their most recent company in this category was Duolingo (NASDAQ: DUOL), which went up 34% in 48 hours. That success may entice users to buy into HOOD before the July 29th deadline.
It’s pure conjecture at this point. The numbers don’t seem to add up to the $33 billion valuation, but the impact of the masses can never be underestimated. Robinhood is unique because they’re putting their share price in the hands of their users. That could pay off big. In any event, there is still plenty of room for improvement at Robinhood.
Disclosure: Neither Matt Rego nor Spotlight Growth have any position or relationship with any companies mentioned in this article. No payment was made to create this article. This article should not be taken as a solicitation or recommendation to buy or sell any securities. Please conduct your own research and consult your financial advisor to determine your risk tolerance and investment path. We are not licensed brokers or investment advisors.