Robinhood’s IPO: what you need to know

The somewhat controversial stock trading app Robinhood filed for an IPO in March 2021 – it’s likely the listing will take place in late Q2. Discover everything you should know about Robinhood before it goes public, including how Robinhood makes money and how you can trade Robinhood stock.

Trader 3

What is Robinhood?

Robinhood is a trading and investments provider focused on providing market access to younger and beginner traders via mobile app. It’s known for commission-free trades on stocks and exchange traded funds, as well as its fractional shares offering that enables users to buy just a percentage of an asset.

The company was launched in 2013 and rose to popularity thanks to its ‘market access for all, not just for the wealthy’ ethos. It was particularly popular during the cryptocurrency boom of 2017, as it provided commission-free crypto trading on Bitcoin and Ethereum.

When is the Robinhood IPO?

Robinhood has confidentially submitted a draft registration statement (S-1) with the Securities and Exchange Commission (SEC) for an IPO. The number and price of shares haven’t been released yet.

While there is currently no date for the IPO, it’s expected to take place after SEC completes the review process – provided market conditions are favourable for Robinhood.

Find out more about potential upcoming IPOs in 2021.

How much is Robinhood worth?

In September 2020, Robinhood raised $660 million in a Series G funding round, which valued the company at $11.7 billion.

On February 1 2021, Robinhood announced that it had raised a further $3.4 billion in an investment round featuring Ribbit Capital, ICONIQ Capital, Andreessen Horowitz, Sequoia, Index Ventures, and NEA.

How does Robinhood make money?

Robinhood makes approximately 50% of its money through a system known as payment for order flow. Essentially, when anyone trades using Robinhood’s app, that order is sent to a third-party entity, which will be placing thousands of orders at once at a lower rate. For sending through the orders, Robinhood would be compensated.

The other 50% of Robinhood’s money is made from interest charged on each user’s cash held in their account and Robinhood Gold – the provider’s margin service.

Is Robinhood profitable?

Robinhood generated $682 million in payment-for-order-flow revenue in 2020. This represents a 514% increase year on year.

As Robinhood had over 13 million users in early 2020 (probably closer to 20 million now), who will each be earning Robinhood commission from market makers, it’s unsurprising that the company is seeing revenues increase rapidly. Especially as Covid-19 has caused a dramatic amount of market volatility.

Year

Payment-for-order-flow revenue

2015

$2.9 million

2016

$9.3 million

2017

$21 million

2018

$69 million

2019

$111 million

2020

$682 million

As this is only somewhere between 40-50% of Robinhood’s total revenue, we can assume the end sum is in the region of $1.3 billion.

What is Robinhood’s business model?

Robinhood’s business model is built entirely around the concept of ‘democratising finance for all’ – taking its name from the folklore hero Robin Hood, who stole from the rich to give to the poor. By making half its revenue from commission it earns from third-party market makers, Robinhood can charge its own clients less.

This low-fee system, coupled with the ‘incremental investment’ concept that allows people to buy fractions of shares, has attracted huge numbers of millennial clients and novice traders, who might not have had the funds to trade with the larger, more traditional brokerages.

It’s worth pointing out that this system has got Robinhood into some hot water in the past, as clients’ inexperience meant they were often unprepared for the high level of risk involved in trading.

Robinhood did have plans for international expansion; however, these were cancelled for both UK and Australian markets in 2020. While the cause of this change in direction was probably down to Covid-19 uncertainty, it’s also not surprising given that payment for order flow is banned in the UK, and Robinhood’s business model is dependent on these third-party payments.

Who are Robinhood’s competitors?

Robinhood sits in the fast-growing fintech industry, where both more traditional investment firms and new-digitally focused firms compete for clients. The popularity of Robinhood’s zero-commission business model has caused major brokerages and investment providers across the world to reduce their fees.

One of Robinhood’s most direct competitors is eToro, another trading and investment app focused on the novice traders. eToro is also looking to IPO in 2021, so the race is on to see which company makes it to market first.

According to a press release from eToro in March 2021, it has 20 million users, which is 7 million more than Robinhood. However, Robinhood is predicted to be valued at $40 billion compared to eToro’s $10.4 billion valuation.  

Robinhood scandals

Robinhood has faced a number of controversies in its lifespan, most notably:

  • The suicide of Alex Kearns. After seeing a negative cash balance of $730,000 in his Robinhood account, Alexander Kearns committed suicide. In his note, he criticised Robinhood for their treatment of customers who didn’t understand the risks involved
  • SEC’s investigation into selling customer information. In September 2020, it was revealed SEC was looking into Robinhood’s practice of selling clients’ orders on to high-frequency trading firms. Robinhood paid $65 million to settle the case
  • Massachusetts’s complaint of gamification. The Massachusetts Securities Division filed a complaint against Robinhood for breaking the state’s laws by failing to meet the best interests of its customers. They argued that the gamified trading platform meant novice traders were being put into high-risk situations without fully understanding what they could lose
  • The GameStop short squeeze. Following a group of Reddit users driving up the price of GameStop to force Wall Street hedge funds into a short squeeze, Robinhood restricted which stocks could be traded. This caused a backlash against the firm for manipulating the market to protect the hedge funds, resulting in investigations by regulatory authorities and the filing of around 46 putative class actions and three individual lawsuits. Robinhood was also forced to raise $2.4 billion in convertible debt to cover collateral requirements with clearing houses during the increase in volume.

Who owns Robinhood?

Robinhood is currently privately owned. It was created by Vladimir Tenev and Baiju Bhatt in 2013, who served as co-CEOs together from 2013, and still own the majority of the company’s shares.

Ahead of the Robinhood IPO, Bhatt stepped down from his position as co-CEO, and will only serve as co-founder and board member. Supposedly this was to ensure smoother leadership, and as Tenev was the more ‘visionary’ of the two, it was decided he’d be a better fit.

Other notable investors include Ribbit Capital, ICONIQ Capital, Andreessen Horowitz, Sequoia, Index Ventures, and NEA.

Who are the directors of Robinhood?

Name

Position

Vlad Tenev

Co-founder, CEO and Board member

Baiju Bhatt

Co-founder and Board member

David Dusseault

President and Co-Chief Operating Officer

James Swartwout

President and Co-Chief Operating Officer

Gretchen Howard

Co-Chief Operating Officer

Norm Ashkenas

Chief Commercial Officer

Jan Hammer

Board member

Scott Sandell

Board member

Meyer Malka

Board member

Rich Longo

Advisor to the Board

How to trade Robinhood shares

When Robinhood lists, you’ll be able to trade its shares in the same way you would any other publicly-traded company on the stock market.

You can trade stocks with Forex.com using CFDs, with spreads from 1pt. Follow these easy steps to start trading:

  1. Open a Forex.com account, or log in if you’re already a customer
  2. Search for the company you want to trade in our award-winning platform
  3. Choose your position and size, and your stop and limit levels
  4. Place the trade

More from IPO

Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.