US e-commerce firm Robinhood has finally filed for its long-awaited listing in what is sure to be one of the most watched IPOs in recent years.

The company, which grew rapidly last year but was at the center of a storm due to trading blackouts and trading access restrictions earlier this year when capital limits were reached; it is targeting a valuation of around $ 40 billion. The stock is listed on the Nasdaq under the symbol HOOD.

Regulatory control

The S1 prospectus was scrapped just a day after FINRA fined Robinhood $ 70 million for “widespread and material injury” to its clients. The investigation continues and Robinhood expects more penalties. There are numerous other cases, including class actions relating to Robinhood restricting access to trading in a number of highly volatile stocks during the height of the market. GameStop frenzy. As I commented in January when all of this was happening, I didn’t think Robinhood wanted to stop trading – it was just a matter of regulatory capital requirements and value-at-risk models that left the chamber of clearing require more cash in advance.

Since having to secure $ 3.5 billion from PDQ investors, Robinhood has significantly strengthened its balance sheet and now has around $ 4.8 billion in cash or cash equivalents, as well as a new facility. $ 2.2 billion revolving credit to fund margin trading in the event of another volatile episode. .

actions even

“Our vision is for Robinhood to become the most reliable, cheapest and most culturally relevant monetary app in the world,” the company said in the SEC filing document. Part of this involved offering questionable products (like stock options) to relatively unsophisticated traders. (Although the GameStop frenzy proved that the Reddit crowd can be very sophisticated, coming together to focus on cash calls where dealers can’t hedge on stocks with a lot of short interest, l ‘concentrated purchase of the physique to tighten the shorts and create gamma compression on the dealerships).

Robinhood has straddled – and in many ways helped fuel – a retail boom in recent years, especially since the pandemic struck. Retail investment now accounts for around 20% of the volume of transactions in US equities, doubling over the decade 2010-2020. “Still, we believe there is still significant room for growth,” the company says. The meme stocks are a big part of the business and I think that poses a risk, although Robinhood himself could benefit from becoming the next big meme stock himself – a lot depends on the extent of the reputational damage. he suffered this year and the good faith he retains among the crowd of retailers. The fact that it reserves up to 35% of the shares at the time of the IPO for its private clients could be a masterstroke.

Robinhood’s finances

For the fiscal year ended Dec.31, 2020, total revenue increased 245% to $ 959 million, from $ 278 million in 2019. But it’s still not exactly profitable, recording a net profit of $ 7 million. dollars, compared to a net loss of $ 107 million in the prior year. year. Adjusted EBITDA was $ 155 million, compared to a negative amount of $ 74 million.

Fueled by the meme equity craze, the first three months of 2021 saw total revenue rise 309% to $ 522 million, from $ 128 million in the same period of 2020. However, Robinhood recorded a net loss of $ 1.4 billion in the quarter from a $ 1 billion fair value adjustment to its convertible notes and warrants obligations.

Incredibly, Robinhood has doubled the number of users since the start of the year, with 31 million accounts. Of these, 18 million are funded, which is a 151% increase over last year. Fundraising in 2020 indicated a market valuation of around $ 11 billion, but the rapid growth in active accounts and income this year has apparently prompted the company to seek a much higher valuation.

Payment for order flow

Robinhood came under fire in the first quarter of 2021 as the meme stock craze exploded. Among the many charges against the platform was the practice of paying for the flow of orders. Robinhood sells market makers like Citadel customer transactions, which will perform at or better than the current market price. This is what allows for commission-free trading, but has come under scrutiny as it could represent a conflict of interest. Nonetheless, Robinhood made 75% of its revenue last year – some $ 720 million – from the sale of customer transactions. Of this amount, about half comes from Citadel titles (34% of total turnover).

Perhaps the biggest risk for investors: The SEC has already fined Robinhood $ 65 million for cheating on clients about PFOF, as it’s called. And chef Gary Gensler ordered a review of the practice, as well as the “gamification” of the investment via apps and incentives. This would tend to put Robinhood in the sights of the SEC, just as the former seeks to go public and the latter is likely to become stricter. The timing seems problematic for Robinhood.

If the US regulator were to act on PFOF, it could affect the very business model Robinhood has relied on to grow so far. “Because a majority of our revenue is based on transactions, including payment of order flow… reduced price spreads, reduced levels of trading activity in general, changes in our trading relationships with market makers and any new regulations or bans on, PFOF and similar practices may result in reduced profitability, increased compliance costs and increased potential for negative publicity, ”the dossier states.

Crypto Trading: Blame Elon

Robinhood specializes in stocks and stock options, but cryptocurrency trading is a growing part of the business. From just 4% last year, crypto accounted for 17% of revenue in the first quarter of 2021.

Robinhood notes that 34% of its income based on cryptocurrency transactions was attributable to transactions in Dogecoin, up from 4% for the three months ended December 31, 2020. For a token configured as a joke, that’s a staggering amount – roughly 5% of all Robinhood revenue in the first quarter of the year.

“A substantial part of the recent growth in our net income from cryptocurrency transactions is attributable to Dogecoin transactions. If the demand for Dogecoin transactions decreases and is not replaced by a new demand for other cryptocurrencies available for trading on our platform, our business, financial condition and operating results could be affected. Says the S1.

I tend to think that there is always another Dogecoin around the corner. Robinhood currently supports seven cryptocurrencies on its platform. This compares to 25 on Markets.com.

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Regulatory headwinds seem strong, especially with regard to PFOF, which should see stocks trade at a discount. Cryptography is also clearly an area that exhibits a high level of regulatory uncertainty as well as unreliable trading flow and activity. Reputational risk is also a big factor after GameStop and in a very commoditized industry it’s hard to see where Robinhood can really add a lot in terms of margin growth. The company is still not really profitable, and the valuation of over $ 40 billion seems far higher than its peers, even assuming growth continues at a steady pace this year.

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