Robinhood CFO Says IPO Ready

Robinhood's Initial Public Offering: A Detailed Look

This week, Robinhood was initially priced at $38 per share. However, the stock experienced a muted opening and concluded its first day of trading at $34.82 per share, representing a decline of just over 8%.

The company’s performance today presented a varied outlook, initially dropping in value before regaining ground to reach a breakeven point during late-morning trading sessions.

A Less Than Expected Debut

The initial public offering (IPO) did not unfold as some analysts had predicted for Robinhood.

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As the week draws to a close, our focus shifts away from discussions surrounding prohibited Chinese IPOs and comprehensive analyses of mega-rounds. Instead, we will examine insights gained from a conversation The Exchange had with Robinhood’s Chief Financial Officer (CFO) regarding the company’s IPO.

We will also consider several plausible explanations for why there isn't speculation about potential revenue lost by Robinhood due to pricing its public offering below its first-day closing price.

Analyzing the IPO Performance

It’s important to approach this situation with objectivity. The period for making lighthearted comments on social media has passed.

A more thoughtful analysis is warranted at this time.

We will now focus on understanding the factors that contributed to the IPO’s performance and explore potential reasons behind the pricing strategy.

Examining the Timing of Robinhood’s Public Offering

During a recent conversation with Jason Warnick, Robinhood’s Chief Financial Officer, we sought to understand the rationale behind the company’s decision to go public at this particular juncture.

Typically, no executive of a publicly traded company will explicitly state that their initial public offering is motivated by a desire to defend or extend their latest private valuation, capitalizing on prevailing market conditions.

Instead, leaders commonly offer a carefully crafted statement, framing the public offering as a natural progression in the company’s long-term development. It’s a curious phenomenon within our capitalist system, where, during a fundamentally capitalist event undertaken by a for-profit entity, leaders often prioritize minimizing the perceived importance of their IPO.¹

Correspondingly, Warnick did not attribute Robinhood’s public debut to the recent success of consumer tech companies like Airbnb and DoorDash in the IPO market. He also refrained from suggesting that the favorable environment for high-growth tech stocks would likely result in an attractive valuation for the company.

Rather, Warnick highlighted several internal factors, including the strengthening of Robinhood’s leadership team and internal procedures. He also pointed to progress made in user safety enhancements and the expansion of the platform’s functionalities. These points are substantiated by evidence, such as Robinhood’s recruitment of a new head of product in March and several other key hires earlier this year. Furthermore, the company has refined its options trading safeguards for users.

Warnick characterized the IPO and its timing as a logical outcome of Robinhood’s ongoing efforts. This perspective is understandable.

This explanation presents a somewhat paradoxical situation. Robinhood asserts its readiness for the public market, and our assessment of current market conditions suggests a receptive environment for high-growth tech companies, even those with a history of losses. However, the company’s stock performance has been disappointing, and a significant recovery appears unlikely in the immediate future.

Why is Robinhood underperforming despite these favorable circumstances? We previously identified two potential contributing factors:

Robinhood potentially limited demand by offering a portion of IPO shares to its existing user base, potentially impacting the supply and demand dynamics at the start of trading.
The company’s forecast of lower revenue for Q3 2021 compared to Q2 2021 may have caused concern among investors.

These explanations are straightforward. Let’s explore additional reasons why Robinhood’s valuation might be lower than some had predicted:

Revenue concentration presents challenges for Robinhood: A substantial portion of Robinhood’s revenue is derived from payment for order flow (PFOF), which relies heavily on a limited number of market makers. Citadel Securities is the most significant contributor to this revenue stream, and its share of Robinhood’s total revenue has been increasing over time (from 29% to 34% between the end of 2019 and the end of 2020). Moreover, a significant portion of PFOF revenue originates from options trading, which is primarily driven by a minority of users. This concentration of revenue, dependent on both partners (market makers) and user behavior (options traders), may have dampened investor confidence.
Revenue seasonality remains uncertain: Robinhood repeatedly mentioned seasonality in its final S-1/A filing, particularly in relation to its expectation of lower revenue in Q3 2021 due to decreased trading activity, especially in cryptocurrencies, compared to the record highs experienced in Q2 2021. While the company acknowledged the importance of seasonality, it remains unclear how predictable Robinhood’s revenue patterns will be. This uncertainty can negatively impact valuation.
Recent news concerning Robinhood’s CEO also surfaced earlier this week. Such headlines are generally unfavorable leading up to a public offering.

There isn’t a single definitive explanation for Robinhood’s initial trading performance. It’s likely a combination of the factors mentioned above, and potentially others.

The implications of Robinhood’s IPO performance extend beyond the company itself:

For eToro, another consumer-focused exchange planning to go public via a SPAC, Robinhood’s early struggles are a negative indicator.
Other trading-focused startups, such as Public, which has secured substantial funding recently, may face increased challenges in raising future capital in light of Robinhood’s underperforming IPO.

It’s worth noting that Coinbase has also experienced a decline from its post-direct listing highs, even falling below its initial reference price. Like Robinhood, Coinbase is a consumer-facing company that generates a significant portion of its revenue from trading activity, suggesting similar seasonal patterns may affect its growth trajectory.

Furthermore, recent underperformance by tech companies due to missed growth expectations, such as Amazon’s 7.5% opening decline after reporting lower-than-expected revenue growth, may have contributed to dampened enthusiasm for Robinhood’s debut.

Robinhood remains financially secure, possessing billions of dollars in capital, maintaining its existing product offerings, and being in a stronger position than before the IPO. However, a decline in stock price following the debut is undeniably unfavorable.

The rationale behind this downplaying often involves presenting the IPO as a relatively small event compared to the company’s future prospects, and portraying themselves as a mature organization prepared for public scrutiny. CEOs frequently avoid commenting on their stock’s performance during its initial trading period. I have adopted a practice of informing CEOs, jokingly, of their share price at the conclusion of IPO discussions to spare them the need to feign ignorance.