Robinhood Markets Inc (NASDAQ: HOOD) officially listed on the Nasdaq overnight. The debut was one of the most anticipated of the year. It follows a major uptick in the platform’s popularity following the 2020 stock market crash.
The US-based commission-free trading app was confronted with a bleak first day of public trading. Shares in the company fell 8.37% to US$34.82 after the initial public offering (IPO) had raised close to US$2 billion at US$38 apiece.
Let’s take a closer look.
Leading up to IPO
Since rising to prominence during the COVID-19 crash and ensuing short squeezes, Robinhood has been shrouded in controversy. The number of funded accounts on the platform has skyrocketed to 22.5 million as of the second quarter – more than triple the number from Q1 2020.
As account numbers soar, so has revenue for the company. According to its prospectus, Robinhood estimates second-quarter revenue of US$546 to US$574 million. At the lower end that would suggest a 124% rise.
Part of this revenue has been a point of controversy for the trading app company. As revealed in its prospectus, Robinhood generated US$331 million in revenue from payment for order flow (PFOF).
Put simply, PFOF is the compensation a market maker will give to a broker when the broker sends the order to them. While this is not illegal by any means, the company was fined US$1.25 million in December 2019 by the Financial Industry Regulatory Authority (FINRA) for failing to ensure its customers received the best price for orders.
Robinhood’s rocky track record
Additionally, Robinhood was sued in a class-action lawsuit a year later for failing to disclose that PFOF made up a substantial part of its revenue.
Given these events, investors and customers have wondered whether the “investing for everyone” ethos of Robinhood still rings true – ironic when the tale of Robin Hood was to steal from the rich and give to the poor.
What else?
There are risks associated with the PFOF revenue model for Robinhood. Currently the Securities Exchange Commission chair Gary Gensler is reviewing PFOF. Likewise, the prospectus outlines regulatory interventions as a risk to revenue growth for the company.
Furthermore, CNN yesterday reported regulators have launched an investigation in CEO Vlad Tenev’s lack of a FINRA issued license.
Lastly, Robinhood is valued at a market capitalisation of US$29.32 billion based on its share price.
The post Lions become lambs as Robinhood (NASDAQ:HOOD) falters on debut appeared first on The Motley Fool Australia.
Should you invest $1,000 in Robinhood right now?
Before you consider Robinhood, you’ll want to hear this.
Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now… and Robinhood wasn’t one of them.
The online investing service he’s run for nearly a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.
*Returns as of May 24th 2021
More reading
- Why A2 Milk, Marley Spoon, Origin, & Sezzle shares are tumbling lower
- Fortescue (ASX:FMG) share price falls as iron ore drops below US$200/tonne
- What’s moving the Commonwealth Bank (ASX:CBA) share price this week
- Here’s how much the massive new Rio Tinto (ASX:RIO) dividend is worth
- What’s with the Keytone Dairy (ASX:KTD) share price today?
Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
from The Motley Fool Australia https://ift.tt/3BY05eI
Leave a Reply