Robinhood’s IPO is not a free giveaway

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Robinhood Market enjoys giving away free inventory to attract new customers. The public offering to investors is another matter.

This offering is somewhat similar to recent IPOs such as Coinbase Global and Rocket Cos.,

They debuted amid a cryptocurrency and mortgage boom, respectively. Investors were faced with the challenge of charting a normalized return and a return path. So far, none of these previous examples have worked for IPO investors.

Robin Hood derives most of its income from the transactions of its clients, including cryptocurrencies like Dogecoin. In this disrupted market, it is very difficult to predict what the level of activity will be in a year. In addition, its main source of business income is payment for order flows, one of the hottest topics in finance and Washington.

Among the uncertainties, there is an indicator that cuts a lot of noise. This is how much an investor will pay for an IPO valuation for each funded account. This is one way of comparing Robin Hood to an established journeyman of a retail brokerage firm.

With the proposed IPO price range set on Monday, Robin Hood’s funded client account is worth around $ 1,500 to $ 1,600. E * Trade’s long-term average over the past 15 years was around $ 2,000 before Morgan Stanley acquired it for around $ 1,800, according to figures compiled by Christian Bolu of Autonomous Research. Charles Schwab, a much larger asset and wealth management firm, has historically traded at around $ 3,600 and is now approaching $ 4,000.

Vladimir Tenev, co-founder and CEO of Robinhood Markets. The most important thing to justify an IPO price is the wide appeal of Robin Hood.

Photo:
Daniel Acker / Bloomberg News

As such, the multiples suggest that it is not wild on its own and that while Robin Hood has to change its revenue model, it could be a viable business with just the number of clients. But he also recognizes many growth achievements that Robin Hood has yet to achieve. Think of the typical Robin Hood fundraising account as having around $ 4,500 in assets at the end of the second quarter. A typical account for an established retail broker is often found in the six figures.

Yes, Robin Hood accounts trade more on average. But overall, Robin Hood has a lot less revenue from its clients, in part because of its smaller clients. Robin Hood’s average revenue per user in the first quarter was $ 137. In contrast, according to Autonomous, TD Ameritrade and E * Trade were generating over $ 500 when they were acquired. Charles Schwab was over $ 600 in the first quarter.

Therefore, the price per account means that Robin Hood will dramatically improve the customer’s profit in the future, increase the number of customers at a much faster rate, or a combination of the two. Based on recent history, the chances of faster growth are much higher. Schwab added 1.7 million new net securities accounts in the second quarter and Robin Hood added 4.5 million net finance accounts. “The expansion of the investor world is an important driver of our growth at the forefront of the market and we look forward to it,” Robin Hood wrote in his IPO prospectus.

On the other hand, the income trend for each user has already slowed down. Robin Hood’s preliminary results for the second quarter show the average revenue per user has fallen to less than $ 120. Robin Hood said cryptocurrency and options trading was on the rise, while second-quarter stock trading activity was lower than it was a year ago. .

The business can rely on other sources of income, such as margin loans to customers and cash management. But low prices are an important part of the company’s mission to expand its customer base. The company is still in the process of building a securities lending platform, which could increase its revenue. That said, it faces a slowdown in business activity, including cryptocurrencies in the third quarter, according to the company, but it’s hard to expect significant growth in revenue per user in the near future.

Therefore, the most important thing to justify the price is the wide appeal of Robin Hood. This makes the IPO itself a pivotal moment. Robin Hood will potentially distribute more than 20 million shares to its clients through its single platform. If for some reason the deal doesn’t perform well outside the gate, it can frustrate some of the more enthusiastic customers.

Investors may have to wait for the dust to settle on this offer before considering buying Robin Hood shares for themselves.

The Robin Hood brokerage firm has transformed the retail business. The WSJ is eagerly awaiting the IPO and explains its rise in a series of legal inquiries and regulatory challenges. Photo illustration: Jacob Reynolds / WSJ

Write to Telis demonstration at [email protected]

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Robinhood’s IPO is not a free giveaway

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