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By MIKE STENGER, Associate Editor, Money Morning
Robinhood revolutionized online stock trading.
It offered commission-free trades before anyone else.
It was the battlefield for young retail traders going toe to toe against hedge funds in the frantic "meme stock" market.
And most recently, it became the first broker to give every retail trader an equal shot at buying IPO shares with Robinhood IPO Access.
Now, we await the Robinhood IPO itself. The company plans to offer shares of Robinhood stock through IPO Access under the ticker "HOOD."
It's just a question of when.
Let's talk about that and whether or not you should try for Robinhood IPO shares.
When is the Robinhood IPO Date?
Robinhood stock was made available through Robinhood IPO Access on July 19.
The IPO date could land around July 29 or whenever the stock finalizes its price. The company expects to trade between $38 and $42.
Rumors started in 2018 when then-CEO Baiju Bhatt mentioned IPO plans to TechCrunch. But as plans often go, Robinhood IPO progress has slowed.
The company endured audits from the Financial Industry Regulatory Authority, the U.S. Securities and Exchange Commission, and its own security team - to make sure it exceeds security standards.
That was even before the company enraged users by pausing trades on meme stocks like GameStop Corp. (NYSE: GME) and AMC Entertainment Holdings Inc. (NYSE: AMC) because it couldn't keep up with clearing house costs.
The crazy thing about it all is that Robinhood was mostly unknown until 2017. Now, it has legacy brokers like TD Ameritrade Holding Corp. (NASDAQ: AMTD) and Charles Schwab Corp. (NYSE: SCHW) on the defensive.
Robinhood has become a real contender for one of the best online trading platforms, with a booming valuation of $11.7 billion. And with so many people waiting in anticipation to invest in the firm, its valuation could soar to even greater heights at its IPO.
But even with this company's insane potential and all the surrounding excitement, you may not want to buy Robinhood stock immediately following its IPO.
Let's take a look at why Robinhood might not be the IPO stock you want...
How Robinhood Got Its Start
Roughly a decade ago, co-founders Baiju Bhatt and Vladimir Tenev were classmates and roommates at Stanford University.
Once they graduated, they packed up and moved to New York. Within two years, they had built two finance firms that sold trading software to hedge funds.
But during their time in New York, they noticed something unsettling. The big companies on Wall Street paid next to nothing to trade stocks on the market, while everyday folks were charged as much as $10 per trade.
After realizing this, they saw an opportunity to create a platform that could give everyone a chance to invest in the market, not just the hyper-elite.
After two years in New York, the co-founders made their way back to California and started what would eventually become Robinhood.
Initially, investor sentiment was cold. The two had met with 75 potential investors, and all of them were skittish over funding a trading platform that had zero fees.
But the two continued to hustle. And eventually, a few investors, like Serik Kaldykulov, saw the potential in Robinhood.
By 2013, Robinhood launched with $3 million in venture capital, according to US News. And within the first 30 days, the trading platform had accumulated over 100,000 users.
It's been almost seven years since then. But in that time, Robinhood has built up an active user base of more than 6 million people. Beyond that, it has become a trading platform powerhouse with a valuation of $11.7 billion.
The firm has even received investments from big-name celebrities like Jared Leto, Jay-Z, Snoop Dogg, and Nas.
Now, Robinhood has garnered the attention of Venture Capital firms like Sequoia Capital as well. It's become a private company that many analysts see a great deal of potential in.
Robinhood's App and Finances
Initially, Robinhood set out to challenge traditional trading platforms. US News reports that for close to 200 years, big brokers charged fixed-rate commissions. Even back in the 1970s, some trades could cost investors hundreds of dollars.
Of course, by 2014, trading fees dropped to anywhere from $5 to $8 per trade for major platforms like Fidelity National Financial Inc. (NYSE: FNF) and TD Ameritrade. But that was still expensive for the average trader, especially if you were only buying or selling a small number of shares at a time.
Robinhood saw an opportunity. The company said that even these lower fees were still gouging everyday folks for their money while the hyper-wealthy paid next to nothing.
Instead, they created a free and simple trading platform. Through Robinhood's mobile app (available for Android and iOS), folks can easily deposit money and start investing from their smartphones with zero fees.
Robinhood has a sleek, barebones user interface that makes it perfect for novice and tech-savvy investors alike. In fact, that's the demographic Robinhood is going after - young, tech-savvy investors interested in playing the market, but who don't need all the complexities you'd find with full-service brokerages.
But if you want even more services, you can sign up for Robinhood's $10-a-month Gold premium service. This enables users to transfer $1,000 into their account instantly, rather than waiting for the standard five-day verification period.
Plus, Robinhood incentivizes its users to invite people to use the app by offering a free stock for each person they get to sign up. And Robinhood has branched out beyond traditional stocks and now offers options trading, cryptocurrency trading, and FDIC-insured cash management accounts.
According to Crunchbase, this has helped Robinhood raise about $862 million since 2013 and has launched its valuation to where it is today.
While all of this makes the firm sound like it's living up to its name, there's a bit more going on under the hood. In fact, one of the biggest driving factors behind Robinhood's growth is a controversial practice...
Robinhood's Controversial Business
Robinhood's platform doesn't charge a per-trade fee to its customers, but that doesn't mean customers aren't paying for their trades.
This is thanks to Robinhood selling its users' orders to high-frequency trading firms like Virtu and Citadel Securities, according to CNBC.
While Robinhood says the practice is benign, it's made the company a lot of money.
A report by Alphacution said the firm's order flow revenue rocketed 227% to $69 million in 2018. That was supposedly 40% of the firm's total revenue for the year, as recorded in the report.
Here's how it works.
Since high-frequency traders know you're buying shares, it's likely they'll end up charging you slightly more for each share. So, there's a good chance you're paying a higher price than you would on another platform. And even though it might just be pennies or a fraction of a penny, it adds ups, especially on larger orders.
In the end, the trades appear to be free, but you're ultimately paying for them in other ways, and Robinhood gets a cut.
But controversial practices aren't the only thing weighing against the Robinhood IPO...
Robinhood Is Competing Against the Biggest Brokerages in the World
Since 2013, Robinhood has been competing against financial powerhouses that have been around for decades.
It was able to turn the only trading market on its head by catching these big players off guard. But these firms have already made moves to match Robinhood's business model.
These finance giants include firms like Fidelity, TD Ameritrade, and Charles Schwab.
Both TD Ameritrade and Charles Schwab have begun offering free trading, rivaling what made Robinhood unique in the first place. They've practically solidified their places as top brokerages and have nearly boundless resources to combat the competition.
These companies now plan to merge, combining billions in pure profits.
Even with Robinhood's surge in popularity, it doesn't even bring in a fraction of what these bigger firms do.
Yes, Robinhood was profitable in 2020, with $7.45 million net income on $959 million revenue. And that is stunning after a $107 million loss on $278 million the prior year.
But it's still chump change compared to the big players.
To put this into perspective, both TD Ameritrade and Charles Schwab saw over $4 billion and $11 billion in revenue, respectively, in 2020.
Of course, these two firms have almost 50 years of brand recognition over Robinhood as well. But it means Robinhood is facing an uphill battle, and it may have already peaked.
The Robinhood IPO could easily be the company trying to cash out before its revenue takes a hit from the big players fighting back.
Should You Buy Robinhood Stock?
The answer to this would have been much clearer before 2021. Robinhood's push to democratize IPOs makes its own IPO that much more enticing.
The prospect of getting in on the ground floor of an IPO of a company levels the playing field between retail investors and institutions that used to enjoy exclusive IPO Access.
That said, we told you before Robinhood IPO Access that the stock had an uphill battle to fight. This is still true.
The company faces mammoths in its industry. Along with that, it must navigate the tricky legal waters as it tries new and daring innovations to beat legacy firms like TD and Schwab.
Plus, innovation comes at great cost. We saw from Robinhood's IPO prospectus that the company took a $1.4 billion loss in just the first three months of 2021.
That's essentially the icing on a cake.
Robinhood isn't profitable. Many institutions and retail traders alike have grilled it for its practices amid the meme stock frenzy.
Ultimately, what Robinhood wants to accomplish is extremely tricky. But if it can pull it off, anyone who bought IPO shares will be glad they did.
If you like asymmetric plays - that is, high risk or reward - Robinhood is one of those. But always bear those risks in mind.
About the Author
Mike Stenger, Associate Editor for Money Morning at Money Map Press, graduated from the Perdue School of Business at Salisbury University. He has combined his degree in Economics with an interest in emerging technologies by finding where tech and finance overlap. Today, he studies the cybersecurity sector, AI, streaming, and the Cloud.