New York (CNN Business)Robinhood has officially started its life as a public company, marking a milestone for a company that has revolutionized the way Americans trade.
The controversial trading platform opened at $38 on Thursday, matching its initial public offering price. That suggests Wall Street bankers priced the IPO correctly but that demand is lukewarm.Robinhood quickly broke below the IPO price and traded down about 10% before bouncing back to its opening price.
The fast-growing trading company failed to raise as much money as it had hoped. Robinhood’s initial public offering priced at $38 a share, the low end of the expected range.
The deal values Robinhood at about $32 billion, making it more valuable than major companies including Nasdaq (NDAQ), Southwest Airlines (LUV) and Kroger (KR). That’s well above the $12 billion price tag Robinhood scored in its most recent round of private funding. Read MoreAnd yet Robinhood failed to hit the $35 billion valuation it hoped for. The IPO is raising $2.1 billion and Robinhood began trading on the Nasdaq Thursday under the ticker symbol “HOOD.”
CEO Vlad Tenev on why now is the right time for Robinhood's IPOThe deal is a major step for a company that pioneered zero-commission trading and is enjoying explosive growth.”It’s humbling,” Robinhood CEO Vlad Tenev told CNN’s Julia Chatterley on Thursday. Tenev, an immigrant from Bulgaria, pointed to how he first arrived in New York City as a five-year-old in the early ’90s and began his entrepreneurial career in New York as well.”Now to be back here after six years since Robinhood’s launch, it’s really surreal,” Tenev said.Robinhood’s revenue surged by 245% last year to $959 million as its user growth and trading volume skyrocketed.”The business has been a juggernaut. They’ve got a great platform they can build off of,” said David Weild, former vice chairman of the Nasdaq who is now the CEO of investment bank Weild & Co.
‘It seems rich’
Investors are paying a premium for Robinhood’s growth. At the IPO price, the deal values Robinhood at about 21 times trailing revenue, according to Renaissance Capital. That compares a multiple of just five for Charles Schwab (SCHW), a rival that is expanding at a slower pace. “It seems rich — unless the company can keep up this high growth,” said Kathleen Smith, a principal at Renaissance Capital, which manages the Renaissance IPO ETF (IPO).
Robinhood reveals new regulatory probes on the eve of its blockbuster IPORobinhood completely disrupted the online brokerage industry by pioneering zero-commission trading. As the company lured new and existing investors to its platform, rivals were forced to eliminate trading fees and join forces just to survive. Now Robinhood is disrupting the IPO process. The company is allowing its users to buy a chunk — as much as one-third — of its IPO shares before they begin trading on the Nasdaq. Normally, only corporate insiders and powerful institutions can get access to these coveted shares.
New regulatory probes revealed
Robinhood’s public debut was delayed by a series of controversies, from record-breaking settlements to massive outages, that raise questions about the company’s business model, management team and ability to keep up with its explosive growth. Just this week, Robinhood disclosed that regulators are investigating the fact that CEO Vlad Tenev is not licensed with FINRA, Wall Street’s powerful self-regulator. (Robinhood has argued Tenev is not required to be licensed because he’s the CEO of the parent company, not its broker-dealer arm.) Asked by CNN if he’s tempted to take the FINRA exam just to “shut everybody up,” Tenev said Robinhood doesn’t think that’s “required at this point.” When asked if he’d do it when Square CEO Jack Dorsey gets registered with FINRA, Tenev said: “Maybe.”The Financial Industry Regulatory Authority and the Securities and Exchange Commission are also probing whether Robinhood employees traded shares of GameStop (GME), AMC (AMC) and other “meme” stocks ahead of the trading platform’s infamous trading restrictions in January.
Robinhood settles lawsuit over 20-year-old trader who died by suicideLast month, FINRA slapped the brokerage with its biggest-ever penalty and accused the company of harming millions of customers and giving investors “false or misleading information.” FINRA cited, in part, options trading procedures at the heart of a recently settled lawsuit filed by the family of a 20-year-old Robinhood trader who died by suicide last year. Robinhood neither admitted to nor denied the FINRA charges. Asked if Robinhood is mature enough to be a public company, Tenev pointed to improvements made in leadership, customer support, infrastructure and technology.”You can see how much the company has grown,” he told CNN.Weild, the former Nasdaq executive, said Robinhood’s struggles may have only enhanced public awareness about the company — something that, ironically, could help the company. He likened the situation to challenges that faced America Online during its rapid expansion in the 1990s. “All it did was increase their visibility and branding,” Weild said.
‘These are not free apps’
But Robinhood’s struggles have also shined a bright light on the company’s controversial business model, known as payment for order flow. Like some other online brokerages, Robinhood makes most of its revenue by selling its retail order flow to high-speed trading firms like Citadel Securities. Robinhood argues that this tactic benefits everyday investors because it has paved the way for no-commission trading. But others say it’s really the high-speed trading firms that are benefiting — otherwise they wouldn’t be paying Robinhood for the order flow.
A surprising tech company could be next to join the DowNow the very business model that Robinhood is so reliant on is in doubt. The Securities and Exchange Commission is reviewing payment for order flow. SEC Chairman Gary Gensler warned in May that there are “inherent” conflicts of interest in this business model and expressed concern about the gamefied nature of trading apps.”These are not free apps. They are just zero-commission apps. The cost is inside the order execution,” Gensler told lawmakers. If the SEC bans payment for order flow, it would deal a blow to Robinhood and force the company to find new sources of revenue.
Levered to the market boom
Robinhood faces competition from not only well-established online brokerages, but from upstarts like Public.com and Invstr that market the fact that they do not sell retail order flow to high-speed traders.
Smith, the Renaissance Capital executive, said another risk is how closely linked Robinhood’s bottom line is to the fate of booming markets. “What if we get a negative market? People could easily get turned off if they lose money,” Smith said. “This company is so levered to equity and crypto markets. A downturn would hurt Robinhood more than a Charles Schwab.”
Source: edition.cnn.com