Private Wealth Manager at Currency.com Cryptoexchange Valeriy on the losses and profits of a popular investment application and why investors should be careful when investing in company shares.
Robinhood is once a company known only in the US, but in the last couple of years the situation has changed so that it is known about it outside America.
In early July 2021, the Robinhood management announced plans for an IPO. The shares will be listed through the Nasdaq exchange, under the ticker HOOD.
What an investor needs to know about investing in Robinhood stock?
Company description
Robinhood is an online broker that was released in 2013. Vlad Tenev and Baiju Bhatt are behind the creation of the site.
The creators of the Robinhood platform set the following as their goal: to create a simple and convenient trading application that will respond to all generated user requests regarding trading.
The exclusive feature of Robinhood is the absence of trading commissions, which attracts an impressive flow of clients.
Robinhood provides the ability to trade stocks, options, cryptocurrencies and other trading instruments.
The site has combined two qualities that contribute to the daily increase in customer flow – they are simplicity and low cost.
It should also be borne in mind that old school traders are used to complex trading terminals.
Young people, on the other hand, choose the path of least resistance: the simpler the trading application, the more it will be in demand among the younger segment of the population.
Robinhood is a “unicorn” in this regard, because no trading service, app or exchange can boast an average customer age of 31.
A first time hearing about Robinhood may have a logical question: if a broker does not charge trading commissions, how does he make a profit?
The main source of the site’s income is the sale of a paid Robinhood Gold subscription, which costs $ 5 per month.
The amount may seem small, however, as of March 31, 2021, Robinhood had 1.4 million subscribers.
Buying a subscription from a broker provides the client with the following: expanded access to market data, daily and weekly analytics from MorningStar, instant account replenishment, which does not depend on the speed of transaction processing by the bank.
Financial performance
2021 kicked off positively for Robinhood. In the first quarter alone, the broker’s revenue increased from $ 128 million to $ 522 million.
It should be borne in mind that after the growth in profit, losses increased by $ 1.4 billion, which exceeds the same indicator for 2020 and is an absolute anti-record for the entire history of the company.
Based on the considerable losses of Robinhood, the following theory appeared on the network: financial markets remember the acceleration of the value of GME shares in January 2021.
Due to the sudden “pump” of the price of securities, a wave of liquidations of shorter swept across the market, among which there were also Robinhood clients.
Soon, the Robinhood management gave an official comment: convertible bonds contributed to the increase in losses.
When the convertible bills were issued, the value of those shares that were pledged also increased, because their price became higher than the borrowed amount.
Thus, Robinhood incurred nominal losses, which are in no way dependent on the quality of business and the market situation.
IPO: risks and plans
The main and, perhaps, the only disadvantage of Robinhood is the practice of selling the order flow.
By using this business model, the broker is attracting attention from government regulators such as the SEC and Congress.
In addition, Robinhood was already in litigation with the US Securities and Exchange Commission. If the US legislation begins to tighten against the practice of selling order flow, then the broker may have problems.
Not to be missed is the fact that the GME incident has seriously impacted the broker’s reputation.
Robinhood had to suspend trading due to high volatility. The official comment at the time was as follows: trading was suspended due to liabilities and net capital requirements.
After that, Robinhood had to raise $ 3.4 billion of unplanned investments, which helped to cover losses in this situation. In short, Robinhood’s business model is questionable.
The regulation of cryptocurrencies in the United States, which promises to become much stricter, will also not carry positive news for the broker, because he is considered to be friendly to cryptocurrencies.
Against the background of all this, it can be noted that the time for the IPO is the most favorable.
Financial markets around the world are growing, and only the US IT sector is worth it. The number of individual investors is growing daily.
There is a high probability that as soon as the flow of new investors returns to the previous channel, then Robinhood revenue will decrease.
Despite the risks, Robinhood plans to get an estimate of $ 35 billion, and the price per share will fluctuate in the range of $ 38 to $ 42.
The company named such figures based on the latest round of financing, where it was estimated at $ 30 billion.
Let’s summarize
Robinhood, in terms of an investment vehicle, is both attractive and alert. On the one hand, this is a platform with a huge number of young clients, and since 2013 the broker has shown excellent growth potential.
On the other hand, Robinhood has a controversial business model, litigation with government regulators and a positive attitude towards cryptocurrencies, the legal background of which is going to be tightened.
Therefore, before giving their money to Robinhood, an investor should think about this step more than once and be ready for anything.
The message contains information about the movement of the market, is not an investment research, should not be considered as investment advice.