Robinhood IPO Valuation: Targets Up To $35B Despite Crypto Concerns

Robinhood's Initial Public Offering Details

This morning, Robinhood submitted an S-1/A filing, revealing its preliminary IPO price range. The company initially filed for its public debut in early July, following substantial fundraising efforts earlier in the year.

The prominent U.S. fintech company plans to offer its shares to the public at a price point between $38 and $42 per share. Robinhood is offering 52,375,000 shares in its IPO, representing a potential valuation of $2.0 billion to $2.2 billion.

Existing shareholders are also offering 2,625,000 shares as part of the IPO. Furthermore, the underwriting banks involved have an option to acquire an additional 5,500,000 shares during the transaction.

Considering all share offerings, Robinhood’s IPO could involve trading activity valued at over $2.5 billion at the upper limit of its proposed price range.

Analyzing Robinhood’s Valuation

Our focus is to determine Robinhood’s basic and diluted IPO valuation ranges. We will also examine the company’s recently published preliminary financial results for Q2 2021.

Subsequently, we will perform calculations to assess the reasonableness of Robinhood’s current price range. This analysis will help us understand the potential value of the company.

Finally, we will consider the possibility of Robinhood adjusting its price range prior to its official market debut.

Let's proceed with a detailed examination of these factors.

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Assessing Robinhood’s Valuation

Let's begin by determining several valuation benchmarks for Robinhood, to provide context for its initial public offering (IPO) price range of $38 to $42 per share.

Following the IPO, Robinhood’s outstanding share count is projected to be 835,675,280, excluding shares potentially purchased by underwriters. This share count results in a valuation of $31.8 billion at $38 per share, and $35.1 billion at $42 per share. Including the possible purchase of 5.5 million shares by its banking partners as part of the IPO would increase these figures by $209 million and $231 million, respectively.

Understanding Fully Diluted Valuation

A key metric for discussion will be Robinhood’s fully diluted valuation. At the midpoint of the proposed price range, the company’s value exceeds $38 billion when considering shares allocated through vested Restricted Stock Units (RSUs) and options. This figure reaches approximately $40 billion at the higher end of Robinhood’s pricing range.

Therefore, Robinhood’s valuation, based on a simple share count, is estimated at $35 billion, potentially reaching $40 billion when all equity is factored in. These valuations are substantial, reflecting the company’s rapid growth over the past 18 months. This transition from a promising startup to a leading disruptor is poised for public market acceptance, contingent upon a successful IPO within the projected price range.

Considering current market conditions, how do these proposed prices appear?

• Simple Share Count Valuation: $35 billion
• Fully Diluted Valuation: Up to $40 billion

These figures demonstrate a significant market expectation for Robinhood’s future performance. The company’s trajectory has been remarkable, and its public debut is keenly anticipated.

Robinhood's Performance Analysis

Generally speaking, Robinhood surpassed its financial results from the first quarter of 2021 during the subsequent three-month period. The company anticipates reporting revenue between $546 million and $574 million for the second quarter of 2021. This is offset by projected operating costs ranging from $536 million to $486 million.

Consequently, these figures suggest potential net losses between $537 million and $487 million.

However, for those focused on adjusted metrics, the company’s adjusted EBITDA for the second quarter is forecasted to fall between $59 million and $103 million.

For context, in the first quarter of 2021, Robinhood recorded revenues of $522.2 million and a net loss of $1.44 billion. It’s important to note that this loss was significantly impacted by a $1.49 billion accounting charge and wasn’t fully indicative of the company’s core operational performance.

In the second quarter of the previous year, Robinhood generated $244 million in revenue, resulting in a net income of $58 million and an adjusted EBITDA of $63 million.

Currently, a detailed understanding of how Robinhood’s record Q2 2021 revenue translated into substantial net losses remains unclear. It’s possible that another accounting charge is a contributing factor, which would substantially reduce the reported net losses.

Key Observation: Robinhood’s expense base has increased considerably over the past year, rising from $186 million in operating expenses during Q2 2020 to a midpoint of $511 million in Q2 2021. This represents a significant increase.

Update: As anticipated, an accounting adjustment played a role. According to the S-1/A filing, “The [Q2] net loss is largely attributable to the factors previously mentioned, along with a $528 million change in the fair value of convertible notes and warrant liability […] which was valued at the end of the three months concluding June 30, 2021.”

Returning to revenue figures, Robinhood’s revenue at the midpoint of its projected range is $560 million. This equates to an annualized revenue run rate of $2.24 billion.

Based on a $35 billion valuation, Robinhood’s worth is 15.6 times its run rate. At its highest IPO price, this multiple increases to 17.9x.

These multiples are not necessarily considered inexpensive, but they aren’t exceptionally high either. In fact, they are lower than the average revenue multiple observed for publicly traded software companies, which Bessemer estimates at 20.5x.

What accounts for this discrepancy? Why is Robinhood being valued at what appears to be a discount compared to current software revenue benchmarks? Here are two potential explanations:

• The current IPO price range may be conservative, with the possibility of a more aggressive pricing strategy.
• Investors may be hesitant to apply a typical SaaS multiple to Robinhood, given the potentially more volatile nature of consumer behavior compared to business clients.

We believe the latter point is likely to remain valid, even if the former proves accurate and Robinhood adjusts its price range upwards. A substantial price increase would be necessary to align with the higher valuations seen in the SaaS sector, considering today’s cloud-based revenue multiples.

Therefore, Robinhood is facing a situation similar to that of video game companies, which typically don’t receive software-level valuations upon going public. This is because their performance can be episodic and dependent on individual product successes or failures. Investors, therefore, often apply a discount despite attractive margins.

As Robinhood serves individual consumers, whose trading activity may fluctuate, it inherently carries more uncertainty regarding future growth than a company like Zoom. Consequently, it will likely trade at a discount to companies with comparable margins and growth rates, but more predictable revenue streams.

The following excerpt from the company’s recent filing illustrates this point:

This perfectly encapsulates the dynamic we’ve been discussing.

Is it probable that Robinhood will revise its price range upwards? The likelihood is around 50/50, considering its relatively modest growth rate from Q1 to Q2, despite the impressive year-over-year growth demonstrated in its latest quarterly report.