Perhaps the crowd isn't as large or quite as merry as they were about Robinhood (HOOD) at the start of the year, but nonetheless, the app that claims to want to "democratize finance", hit the public markets today in what could be the IPO of the year -- in either a positive or negative light.
The company priced at $38 a share, which was the low end of the $38 to $42 range, and Robinhood raised around $2 billion.
"I think it's gonna be a very interesting [IPO] because it is a relatively new model, right? Lot of controversy around the way they get paid with payment for order flow. Lots of uncertainty given outstanding regulatory scrutiny and litigation and fines, and then you have, on the other hand, as much as 35% of the shares may be allocated to retail and so what does that mean for pricing in the aftermarket capabilities, evaluation, volatility and so on. So lots of really interesting moving parts," said Julie Chariell, Bloomberg Intelligence's senior fintech analyst.
One such part is the scrutiny that Robinhood is under by the regulatory watchdogs. On July 26 -- days before Robinhood was set to start trading -- it was announced that the Securities and Exchange Commission and FINRA had launched probes into employee stock trades around the momentum names such as GameStop (GME) and AMC (AMC) , and whether the trades "may have occurred in advance of the public announcement."
The investigations are also looking into the registration status of CEO and founder Vlad Tenev. It's not clear whether or not Tenev needs to be registered. with FINRA, as it is not necessarily a requirement for all executives.
"The thing about our securities laws is they are so precise. And so vague at the same time," Georgetown Associate Professor James Angel said.
The latest scrutiny comes a month or so after FINRA ordered Robinhood to pay a $70 million fine.
Angel, who specializes in the regulation of global financial markets, seemed to shrug off the probes as expected following such an unprecedented situation. In fact, he disclosed that he's interested in buying shares of HOOD when it debuts. And in case you need clarity, he's referring to the trading restrictions that Robinhood and other brokerages placed on stocks like GameStop in January.
Robinhood could face even more pressure going forward. There's a huge question mark looming over both payment for order flow, which is a controversial revenue driver for Robinhood, and cryptocurrencies. It's unclear if payment for order flow will face pressure from the SEC.
"Robinhood explicitly offered to accept less price improvement for its customers in exchange for receiving higher payment for order flow for itself," SEC Chairman Gary Gensler said last month in a speech during which he addressed 'conflict of interest concerns' and the 'gamification' of stock trading on retail brokerage platforms.
And the fact remains, as I stated in my column last week: There is not a lot of love or trust left for Robinhood within the retail investing crowd. Especially when you zero in on the Redditors.
Cryptocurrency is a big unknown. In Robinhood's S-1, "cryptocurrency" was mentioned over 140 times.
"So much of their transaction volume... financial benefits and transaction volume.. is driven by "meme" [crypto]currencies like Dogecoin and other things, and ultimately those have shown to be a fad..." said Hugh Tallents, senior partner at consulting firm cg42.
Whether or not Doge is a fad, Chariell's research does feed into what Tallents said:
"Our base and weak scenarios anticipate sequential declines in PFOF and crypto-trading in 2Q-4Q21, with modest growth in 2022 in the base case. Our weak-case assumption sees further declines in 2022, based on market expectations, plus pressure on PFOF fees earned that may stem from rising regulatory scrutiny."
When Robinhood's first earnings report comes around, crypto will be closely watched. And there's one other segment of the business that will be judged fiercely based on Wall Street's reaction to the IPO and that's the accounts number. When the S-1 was released, Robinhood stated that "As of December 31, 2020 and as of March 31, 2021, [it] had 12.5 million and 18.0 million Net Cumulative Funded Accounts, respectively..."
"I think users coming onto the platform is very important, particularly if we're looking at an environment where overall trading volume is slowing. That seems to be the case, at least in the last few months. This is a forecast for later this year and into next year that we will see a slowdown in trading volume. So, the real test here is the ability for the company to continue to bring on new users, both in the U.S. and then beyond," Chariell said.
There's another company where the stock can be made or broken based on whether the user numbers match Wall Street expectations, and that's Netflix (NFLX) . However, unlike Robinhood, Netflix had time to grow and mature as a tech powerhouse before there were questions about its ability to remain at the top of its game. And if competition is just starting to heat up for Robinhood, is it walking into the public spotlight with a bullseye on its back before it gets a chance to prove itself to analysts and investors?
"The problem they have is that they're not really the best place to do anything now. They used to be the best place for entry level investors to get a foot on the ladder and start playing and testing and investing small amounts and so on. But that's now possible and so many other places and people can do it better," Tallents said. He also believes that now is the "last resort" for the company to go public.
But, as Chariell noted, "...we're still in the relatively early stages of everything, of all this different kind of functionality capability, moving online, moving into a mobile app. I think we're still at the early stages where the market can absorb several players."
Perhaps, with the right public relations moves and genuine interest in the retail investor, Robinhood could start repairing its relationship with the retail crowd. That has not been the case but there are some investors who are at least looking at the stock.
"Robinhood will be amazing long term but I feel that with the amount of selling pressure between crypto and the public I can see this IPO becoming parabolic," Cameron Quinn, a retail investor, pointed out to me on Twitter.