Retail Investing Platform Robinhood Goes Public

UPDATE: This article was initially written after Robinhood's first week of trading. In the week since then, HOOD has skyrocketed to around $60/share. This adds further fuel in our discussion on instability of IPO price. With this price surge, Robinhood could have easily raised additional capital by having a higher opening price.

Robinhood (HOOD) officially listed on the NASDAQ last week.

Robinhood, launched in 2015 with the mantra “Investing for Everyone,” has seen a meteoric rise in popularity over the past few years.

Shares of the company opened near $37, then dropped nearly 6% to close at $34.82 by the end of the day. Robinhood’s IPO was especially interesting, since the company known for giving the power to individual investors did just that by allowing roughly 25% of its IPO shares to be purchased by individual investors using the Robinhood app.

Robinhood’s explosive growth recently picked up additional steam during the “meme stock” craze in the first quarter of 2021. Their platform is focused on providing no account minimums and no trade fees so that anyone can open an account to invest. As a result, Robinhood has shifted into the third largest brokerage in the United States with 18 million funded accounts. This figure puts them above rival E-trade, but below market leaders Fidelity and Schwab.

What is an IPO?

An Initial Public Offering (IPO) refers to the process of offering shares of a private company to the public in a new stock issuance.

If a company chooses to do an IPO, there is a well-traveled path to follow. It files documentation with the SEC and then works with an investment bank (or banks), which guide the company through the entire process. The work that goes into an IPO before a company officially goes public is designed to draw attention to the company to drum up investor interest before its debut on the NYSE or NASDAQ.

Once these steps are completed, IPO shares are traditionally purchased by institutional investors made up of company insiders, mutual fund companies, pension funds, and insurance companies. Once these investors purchase the stock, they are then traded back out into the public market, where individual investors can purchase the stock at what is usually a premium to the IPO price.

What makes Robinhood different?

Robinhood lived up to its namesake with its IPO and gave the smaller retail investor the power to participate directly in the initial public offering of the company. Nearly 25% of the shares available to purchase were provided to individual investors through the Robinhood app. This unusual launch came with some risk. When IPO shares are issued to insiders and institutional investors, the shares are sold with the expectation that the initial investors will not immediately turn around and sell their shares.

The goal of the traditional model is to create a more stable price once the company goes public by limiting the number of shares that eventually trade in the open market. By making shares immediately available to retail investors, Robinhood opened themselves up to the possibility of greater volatility, which resulted in a price drop right out of the gate.

Why is individual investor sentiment so low on Robinhood?

Looking at Robinhood’s numbers, one could conclude that this company has become a champion of the people. Funded accounts have risen 151% since 2020, while assets under their custody have skyrocketed from $19.2 billion in March 2020 to $80 billion in 2021. They were the original zero commission broker, eventually causing rivals Schwab and Fidelity to join suit back in 2019.

Despite these early wins with retail customers, Robinhood found themselves in conflict with their customers at the beginning of 2021. At the peak of the consumer-driven rally of GameStop (GME) and AMC Theatres (AMC), Robinhood began limiting the number of purchases that could be made on these stocks. While this move was made to comply with federal securities laws, Robinhood’s timing created some ill will with many of their retail investors. Many felt that this decision went against Robinhood’s motto of “investing for everyone” by taking away the power from the clientele that Robinhood claimed to serve.

Why does it even matter?

The biggest question that comes from this unique way of bringing a company to market is what this could mean for the future. If successful, Robinhood could change the way smaller companies think about their IPOs.

If Robinhood’s approach provided their shareholders with what they perceive to be an attractive IPO price and stability of price after the IPO, their more-cost-effective approach will be seriously considered by future IPO candidates. This could also increase access to future IPO opportunities for retail investors.

If Robinhood’s approach failed to provide their shareholders with an attractive IPO price, or it fails to provide stability after the IPO, future IPO candidates will be fearful in considering Robinhood’s approach. And the retail investor will continue to be squeezed out of the opportunities created by the IPO market.

Currently, Robinhood offers their customers a feature called “IPO Access,” where they can receive access to purchase IPO shares. With a less-than-stellar opening week for HOOD stock, only time will tell if other companies follow a similar method for their IPOs, though the future may not be as bright as Robinhood portrays it to be.

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