Robinhood priced at $38 per share this week, opened flat and closed its first day’s trading yesterday worth $34.82 per share, or a bit more than 8% underwater. The company posted a mixed picture today, falling early before recovering to breakeven in late-morning trading.
It wasn’t the debut that some expected Robinhood to have.
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To close out the week, we’re not going to noodle on banned Chinese IPOs or do a full-week mega-round discussion. Instead, let’s parse some notes from a chat The Exchange had with Robinhood’s CFO about his company’s IPO and go over a few reasonable guesses as to why we’re not wondering how much money Robinhood left on the table by pricing its public offering lower than it closed on its first day.
Let’s not be dicks about it. The time for Twitter jokes was yesterday. We’ll put our thinking caps on this morning.
Why Robinhood went public when it did
Chatting with Robinhood CFO Jason Warnick earlier this week, we wanted to know why this was the right time for Robinhood to go public.
Now, no public company CEO or CFO will come out and directly say that they are going public because they think that they can defend — or extend — their most recent private valuation thanks to current market conditions.
Instead, execs on IPO day tend to deflect the question, pivoting to a well-oiled bon mot about how their public offering is a mere milestone on their company’s long-term trajectory. For some reason in our capitalist society, during an arch-capitalist event, by a for-profit company, leaders find it critical to downplay their IPO’s importance.1
With that in mind, Warnick did not say Robinhood went public because the IPO market has recently rewarded big-brand consumer tech companies like Airbnb and DoorDash with strong debuts. And he didn’t say that with tech shares near all-time highs and a taste for high-growth concerns, the company was likely set to enter a market that would be willing to price it at a valuation that it found attractive.
Instead, Warnick indicated that there were a few factors at play, including that Robinhood had built out its leadership team and its internal processes, and that it had worked on user-safety-related tasks and expanded the site’s use cases. All of that is true. Here’s Robinhood hiring a new head of product back in March, for example. Here are a few more high-profile hires this January. And Robinhood has tinkered with its options-related guardrails for users.
Warnick also said that the IPO and its timing were akin to a natural culmination of Robinhood’s work. Fair enough.
The comments put us in something of an odd spot. Robinhood says it went public because it was ready. And our read of the markets is that it’s a healthy and appealing time for high-growth tech companies with a history of losses to go public. And yet the company is underwater — and it doesn’t appear it will regain much ground today, if any.
Why isn’t Robinhood doing better given those two points? Yesterday we outlined two ideas:
- Robinhood limited unserved retail demand by making some IPO shares available to its own user base, possibly skewing its supply/demand curve at the start of trading.
- Robinhood’s warnings that it expects a smaller Q3 2021 revenue result than what it posted in Q2 2021 may have spooked some investors.
These are obvious and easy to understand. Let’s expand our list with a few other ideas regarding why Robinhood may simply be worth a little less than some anticipated:
- Robinhood has interesting revenue concentration issues: Robinhood makes lots of money from payment for order flow (PFOF), which depends on a handful of market-makers for incomes. Citadel Securities is the most important of these in revenue terms and is generating more revenue as a portion of Robinhood’s top line over time (29% to 34% from the end of 2019 to the end of 2020). Robinhood also generates a large portion of its PFOF revenues from options trading activity, something that a minority of its users generate. Revenue concentration hinging on both partner (market makers) and generation (options traders) risks could have weighed on investor enthusiasm.
- Seasonality in revenue is not entirely clear: Robinhood mentioned seasonality a number of times in its final S-1/A filing, partially in reference to its expectation that its revenue in Q3 2021 will be “lower” than what it posted in Q2 2021 “as a result of decreased levels of trading activity relative to the record highs in trading activity, particularly in cryptocurrencies, during the three months ended June 30, 2021, and expected seasonality.” The company disclosed that seasonality will matter in other places, but is anyone really sure that they know how seasonal Robinhood’s revenue will prove? Uncertainty is a valuation decreaser.
- And then there was this news item relating to the CEO of Robinhood from earlier in the week. That’s not a headline that you want if you are about to go public.
There is no single answer as to why Robinhood is not performing better in its first trading days. It’s probably a mix of things that we mentioned above, and more.
Now, impacts. Robinhood’s IPO miss may have an effect on the larger startup world that we care about:
- For eToro, another consumer-focused exchange going public via a SPAC, Robinhood’s early trading stumbles are bearish.
- For other trading-focused startups, Robinhood’s declines are not good news. Public, to pick one, has raised oodles of capital in recent months, but now will have to secure future funds in the wake of its rival’s IPO price dipping underwater.
Perhaps we should have been less surprised by the company’s early trading. Coinbase is not only miles off of its post-direct listing highs, but is also under its reference price set during its public debut. And Coinbase is a consumer-facing firm, for the most part, generating a large portion of its income from trading activity. So, the same seasonality that Robinhood warned about is likely present in street expectations for Coinbase’s growth curve.
We’ve also seen tech companies take a haircut this week for missed growth. Amazon opened 7.5% lower today after missing revenue expansion expectations. Slowing growth is not popular, which could have further dampened Robinhood’s debut.
Robinhood is in no danger today; it has billions of dollars more in capital to work with, the same product lineup as before, is in a stronger position today than it was last week, and is worth more. But still, losing ground post-debut is Not Great.
- In case you wanted the reasons why, it’s a mix of wanting the IPO to appear small compared to their company’s future, and to indicate to the investing world that they are a mature firm ready to take on public life. CEOs will regularly tell you that they don’t know where their stock is during its early trading. I have taken up telling CEOs, tongue-in-cheek, what their share price is at the end of IPO chats to save them from having to pretend not to know.