Commonly known as an IPO, an Initial Public Offering is when a company decides it is time to go public. When a company becomes “public” they are listing themselves on one of the exchanges in the stock market. This could be the New York Stock Exchange (NYSE), or the Nasdaq, like Robinhood. Going public allows for a company to receive investments from everyday people like you and me.
The popular trading app Robinhood will be listed on the Nasdaq under the ticker symbol $HOOD, on July 29th. It will be priced in at $38 per share upon trading, valuing the company at $32 billion.
Why This IPO is Unique
Robinhood was once the saver of the everyday investor, or “the common trader” if I must. People were finally participating in the market in simpler ways they could understand. Robinhood made investing and trading so simple, kids could do it. Then came the hype stock fiascos, and when Robinhood had to regulate usage to cover themselves, the people were fed up. Looking back, Robinhood’s actions were somewhat understandable as they are not comparable in size to E*Trade or TD Ameritrade. They just couldn’t take on the amount of orders. Regardless, Robinhood now has a tainted image among investors and is seen only as a place for novices and those with low capital. This is not true, but it’ll be very hard for Robinhood to shake this image.
Still trying to put the retail investor first, Robinhood made their IPO a little special. Robinhood reserved up to 35% of the shares going public for their 22.5 million customers. Without being an accredited investor, it is very hard to participate on the front end of IPOs. An accredited investor is one who has a net worth over $1 million, or has made over $200,000 per year for the past two years. By doing this, Robinhood users have gained access to the IPO day without having to be an accredited investor.
Should You Buy Robinhood Today?
With the recent success of IPOs, it seems like a great idea to buy right away. According to University of Florida professor Jay Ritter, the average first day return of IPOs last year was 41.6%. That’s a sweet deal.
Robinhood on the other hand has some red flags to me. The company image being tainted makes me question if the user number can really grow. With competitors such as Webull, Public, and SoFi, what’s stopping people from taking their money elsewhere? Another red flag is the fire they’ve been under from the legal system. They already paid one $65 million settlement back in December for misleading investors on how they make their profits. Even after this settlement, Robinhood CEO Vlad Tenev is still scrutinized for profiting off of customer’s orders, by selling them to bigger companies, like Citadel.
The majority of Robinhood’s revenue comes from this practice. If new regulations come about barring this practice, their revenues will drop drastically. I think with some fine tuning of business processes Robinhood can last in this industry. IPOs can be exciting, but you don’t HAVE to buy on IPO day. With any stock, it’s probably best to wait a week or two, but with Robinhood, definitely wait.