Robinhood IPO filing caps stunning rebound

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Axios 02 July, 2021 - 08:57am 15 views

When will Robinhood IPO be available?

Robinhood, the stock-trading app that became a household name and media mainstay in 2020, is going public in 2021 after years of speculation. nerdwallet.comThe Robinhood IPO: What to Know

One risk identified in the S-1 is the company’s heavy reliance on cryptocurrency transactions, especially given their inherent volatility. Dogecoin (DOGE-USD), one of the more fluctuant, newer cryptocurrencies, represented a substantial portion of the company’s recent revenue growth.

Dogecoin experienced turbulent growth in 2021, at one point rising over 400% in one week. With much of the increase in crypto transactions attributed to the digital currency, a fall in Dogecoin activity could spell trouble for Robinhood’s bottom line.

“If demand for transactions in Dogecoin declines and is not replaced by new demand for other cryptocurrencies available for trading on our platform, our business, financial condition and results of operations could be adversely affected,” the company said in its S-1.

Fully 17% of the company's revenue in Q1 2021 involved cryptocurrency transactions, a significant increase from the 4% for Q4 2020. Regulations pertaining to the crypto market could negatively impact Robinhood’s future earnings, the report said.

“Future regulatory developments are impossible to predict with certainty,” the company said. “Changes in laws and regulations, or our failure to comply with them, may negatively impact our ability to allow customers to buy, hold and sell cryptocurrencies with us in the future and may significantly and adversely affect our business.”

The company also highlighted cybersecurity risks identified by the New York State Department of Financial Services (NYDFS) in July of 2020. These risks included a number of “matters requiring attention focused primarily on anti-money laundering and cybersecurity-related issues.”

Other risks identified in the S-1 include the ‘meme stock’ frenzy, a phenomena that arose last year most notably with GameStop (GME). Robinhood sparked controversy last January when the company temporarily restricted or limited its customers’ purchase of certain securities after retail investors massively increased the value of GameStop and AMC (AMC) stocks. Dozens of class-action lawsuits were filed against Robinhood in response.

The trading restrictions were placed on AMC and GameStop, along with other speculative securities, in an effort to ensure Robinhood had enough funds to cover regulatory minimums and other user trading requirements. The move received some criticism from retail investors and on social media, but the company defended its actions.

FINRA imposed the largest fine in the agency’s history on Robinhood earlier this week, alleging misleading behavior from the company toward its customers on the subject of margin trading. FINRA alleged that significant damage was done to the “millions of customers who received false or misleading information from the firm, millions of customers affected by the firm’s systems outages in March 2020, and thousands of customers the firm approved to trade options even when it was not appropriate for the customers to do so.”

Some surprise surrounded the company’s revelation of rising revenue ($420 million Jan.-Mar. 2021) but significant losses led by high levels of debt. In the first three months of the year, Robinhood lost $1.4 billion.

Yet the company continues to grow quickly; it doubled its monthly users from 8.6 million in the first quarter of 2020 to 17.7 million in the first quarter of 2021.

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Robinhood said it holds over $11 billion in cryptocurrencies, but Dogecoin makes up the majority, which could make its stock risky for investors.

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This afternoon the American consumer fintech company filed to go public in what will prove to be an early contender for the third-quarter’s most important IPO. Robinhood is going public: In our first look at the company’s IPO filing we observed a quickly growing consumer fintech company that made money in 2020. The company swung to a loss in the first quarter of 2021, but as TechCrunch reported, that loss is largely immaterial.

(Bloomberg) -- Robinhood Markets Inc. basically created meme stocks. Now the popular trading app is warning investors that it could become one.The reason -- outlined in its initial public offering prospectus Thursday -- comes down to the novice investors that love its easy-to-use platform and have driven frenzied trading in names like GameStop Corp. and AMC Entertainment Holdings Inc.Robinhood plans to set aside 20% to 35% of its IPO shares for its own users, according to its filing with the U.S

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(Bloomberg) -- Robinhood Markets has plenty of reasons not to go public.There’s the worry that the exuberant small-time investors who flocked to the online brokerage won’t stick around for the long haul. Or that trading in Dogecoin, which started as a joke, accounted for more than a third of its cryptocurrency revenue in the first quarter. Or that just this week, a Wall Street watchdog levied a record $70 million penalty against the firm.Yet the company that introduced an army of young traders t

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3 On Your Side: Investing app Robinhood faces massive fine, restitution order

azfamily powered by 3TV & CBS5AZ 04 July, 2021 - 07:49am

Robinhood to Pay Finra-Record $70 Million Penalty for Lapses

Bloomberg Quicktake: Now 04 July, 2021 - 07:49am

The 5 most eye-popping disclosures in Robinhood's long-awaited IPO filing

MarketWatch 04 July, 2021 - 07:49am

Like most big, contemporary IPOs, it’s being underwritten by all the big banks –Morgan Stanley excluded, in this case — and the numbers are even bigger, profits are theoretical for now, and the company’s founders will retain a massive amount of control, thanks to the proposed structuring of share offerings. 

But the $12 billion company that wants to “Democratize finance for all” did have some big items worthy of discussion. Here are five disclosures that really gave our eyeballs a workout:

The word “growth” is mentioned 217 times in Robinhood’s S-1 filing, which makes sense considering that it had almost 18 million users at the end of March, a 107% year-over-year increase, which was mirrored by its ballooning revenue, which grew more than 311% over the same time period.

Take a look at some of that growth:

More on the crypto surge later, but for now just revel in the breadth of what appears to be Robinhood’s monetization of the retail trading boom that was sparked by hundreds of millions of people trapped inside during a once-in-a-century global pandemic as the stock market made an unprecedented, parabolic recovery between March 2020 and March 2021.

But Robinhood’s filing is unequivocal in its pitch that the best is yet to come and that even more growth can be found in a world where people are finally leaving their houses after 16 months of terrified boredom and the froth around retail trading is already subsiding.

Expansion into Asia and Europe are explicit parts of this plan, as is the belief that more widespread adoption of individual investing is an organic next step in personal finance. But it has to be mentioned that some of Robinhood’s diehard retail investors abandoned the platform after it had to halt trading on some meme stocks at the height of January’s squeeze.

While that episode made Robinhood a household name, it also made the company’s co-founder, Vlad Tenev, a witness in a congressional hearing and gave a clear sense to many retail traders that the app was not for them. The company is setting aside 20%-35% of its shares for retail investors to buy, but it might not be an easy sell in the current climate. 

On Reddit forum WallStreetBets, one discussion of Thursday’s offering prompted users to discuss how they can short Robinhood’s IPO, with many still angry about January.

One doesn’t usually see six pages of pending lawsuit disclosures in an IPO offering, but that’s the case with Robinhood. 

In addition to disclosing on Wednesday that it will pay out almost $70 million to settle claims by the Financial Industry Regulation Authority that it distributed false and misleading information to its customers, failed due diligence on its approval of options accounts for novice traders and did not provide complete market data to users, Robinhood also admitted Thursday that its lawyers are very busy.

More than 50 class-action lawsuits have been filed against the company regarding January’s trading restrictions, with three individual actions also on the books for good measure. There are also apparently some issues with the Securities and Exchange Commission’s Antitrust Division and the Northern California U.S. Attorney’s Office, which have subpoenaed the company and executed a warrant on Tenev’s cell phone.

Then there are allegation from Massachusetts’ state regulator that the company has broken three state securities laws; New York’s regulator poking into possible money laundering and cybersecurity infractions; 2,000 users in a class-action suit who say their accounts were hacked; 15 class actions about server outages in March 2020 that made national headlines and froze users out of their trading accounts during a market crash; six class actions by users who claim that Robinhood’s controversial “payment-for-order flow” model cheats them out of best execution on their trades; a Finra probe into the same issue; and disclosure of a settlement in a civil suit over the suicide of 20-year-old Robinhood user Alex Kearns, who killed himself after seeing an unsettled options trade on his account had him at a loss of more than $700,000.

But that’s mostly it for Robinhood’s legal troubles headed into the IPO…well, other than a few SEC things and some other lawsuits.

One major takeaway for anyone reading the offering document is that Robinhood is learning a lesson from all that legal mishegas, so “safety,” “oversight” and “education” are the sexy new keywords at a company once known for tossing virtual confetti every time a user made a trade on their phone.

And while the company still makes 81% of its revenue from payment-for-order flow, it clearly wants to give a narrative of evolution to prospective investors. From the S-1:

After spending the past year fending off criticism of its business model, shoring up its tech in the face of huge user growth, moving to better inform and support customers who appeared to be in over their heads, and paying fines to multiple regulators, Robinhood is not being shy about wanting people to know that it’s learned its lesson about playing it safe, or at least safer.

Well, outside of one key thing…

Taking into account that Robinhood also disclosed that it’s holding almost $12 billion of crypto on its books, it looks like the company could be sitting on almost $4 billion of doge, about 7% of all the coins currently in circulation.

But while some would point to the volatility of a cryptocurrency created as a joke about a dog meme, we prefer to mention that this huge holding makes Elon Musk’s doge tweets almost irrelevant, because why listen to a guy who makes electric cars and space rockets when Robinhood might just be, as MarketWatch’s Mark DeCambre expertly speculates, the dogecoin whale that was promised? 

So the people that this company is relying on for the kind of financial avarice that will power a multi-billion trading platform were born after “Dallas” went off the air?

"We probably do not have to wait too long," for a crash in meme stocks like GameStop, the investor told Barron's.

How meme stocks and Fed policy could impact Robinhood's IPO

CNBC Television 04 July, 2021 - 07:49am

Robinhood’s IPO Could Be a Sign the Stock Market Has Peaked

Barron's 04 July, 2021 - 07:49am

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Nothing succeeds like excess, as the old quip goes. Until it doesn’t, which has been the distinguishing aspect of market cycles forever and, most dramatically, in this century. Unlike last year’s pandemic-induced paroxysm, the 2000 bursting of the dot-com bubble and the 2008 financial crisis were marked by initial public offerings by companies eager to seize the moment—and investors’ money.

All of which is prologue to what could shape up as this cycle’s bell-ringing event, the initial public offering of Robinhood, the online broker that pioneered zero commissions and hooked a new generation on investing and trading. The paperwork was filed with the SEC this past week. Financial details about the upstart that purports to democratize investing (and, in the process, was hit with a record $70 million fine by Finra, the brokerage business’s self-regulatory body) are discussed here, but a few salient points are buried deep in the S-1 filing.

Customer assets more than quadrupled, to $80.9 billion, on March 31 from the total a year earlier, with the lion’s share—some $65.1 billion—accounted for by equities. Options comprised a relatively small $2 billion in assets, but generated nearly half ($197.9 million) of the March quarter’s $420.4 million in transactions revenue. Stocks produced $133.3 million in revenue, even though assets in equities were 40 times as large as those in options. Revenue from cryptocurrencies totaled $87.6 million, with customers’ crypto assets totaling $11.6 billion.

While Robinhood makes much of opening the market to neophyte investors with limited means by letting them buy fractional shares of their favorite stocks, that’s not its biggest business. Instead, it’s speculative options trading, which exploded early this year especially among the YOLO (You Only Live Once) crowd willing to stake a few bucks on cheap, about-to-expire calls of stocks talked up on Reddit.

There are signs that the frenzied trading, which peaked during the winter, has eased with the reopening of the economy and the return to the prepandemic normal (and with it an uptick in Covid cases after a steady decline). Trading crypto might be simpler on a brokerage platform like Robinhood, but wasn’t the advantage of DeFi (decentralized finance) supposed to be that intermediaries wouldn’t be needed at all?

Bulls on Robinhood would be betting on continued growth of its independent trading model, rather than investors using passive funds through advisors, which the filing derides. The broker pledged to reserve up to 35% of its IPO for its customers, who are apt to be enthusiastic buyers and, more importantly, hold onto them with “diamond hands” through volatile times.

And, indeed, turbulence, or worse, could lie ahead, Michael Burry told our colleague Connor Smith. Burry, a key player in both the book and film versions of The Big Short, won a fortune by betting against the housing market before the subprime mortgage collapse. More recently, he was an early bull on Gamestop (ticker: GME), but took his profits in 2020’s fourth quarter before the frenzy around the original meme stock took off. Now he’s warning that the craze will end in tears.

“I don’t know when meme stocks such as this will crash, but we probably do not have to wait too long, as I believe the retail crowd is fully invested in this theme, and Wall Street has jumped on the coattails,” he told Connor in an email. “We’re running out of new money available to jump on the bandwagon.”

The Robinhood offering wouldn’t be the first stock sale that could be a top-of-the-market event. Back in mid-2007, Barron’s Andrew Bary called the IPO of Blackstone Group (BX) precisely that, just weeks before concerns about excesses of subprime lending rumbled through the global money markets and months before the Dow Jones Industrial Average peaked the following October.

And who could forget the parade of wacky IPOs in the late 1990s that presaged the potential of the internet, but lacked earnings or revenue or even a viable business plan? By March 2000, Barron’s published its seminal cover story revealing that these dot-com darlings were rapidly burning cash. That very month marked the Nasdaq Composite’s peak; the index would fall nearly 80% by October 2002.

While Burry warns of a crash in meme stocks from their vastly elevated levels, which some of the companies have exploited by issuing richly valued shares, the overall market—now trading at about 21.5 times estimated earnings for the next 12 months—hasn’t approached the bubble levels of past cycles. But surveys of market strategists and institutional investors see little upside, with year-end targets averaging around 4200 on the S&P 500 —shy of Thursday’s close of 4319.

And while it’s always dangerous to say this, it is different this time around from 2000 and 2008. Ahead of crashes in those years, the Federal Reserve had been tightening policy for some time, resulting in a flat-to-negatively sloped yield curve. Shorter-term Treasury yields were pushed above longer-term ones, leading the bond market to predict that the economy was headed for the rocks.

Now, in contrast, the Fed has only begun talking about talking about reducing its massive purchases of Treasury and agency mortgage-backed securities. That would be preparation for the initial liftoff of the Fed’s key federal-funds target rate, currently in a rock-bottom 0% to 0.25% range, in 2022 at the earliest and maybe not until 2023.

The yield curve has flattened a bit in the past three months, with the spread between the two- and 10-year note narrowing to 1.23 percentage points (still a sign of an accommodative policy), from 1.59 points on March 29, according to the St. Louis Fed.

But there is also a psychological element at play in any market frenzy. “Most investors also seem to view the stock market as a force of nature itself. They do not fully realize that they themselves, as a group, determine the level of the market,” Nobel laureate Robert Shiller wrote in his now-classic book Irrational Exuberance.

“In short, the price level is driven to a certain extent by a self-fulfilling prophecy, based on similar hunches held by a vast cross-section of large and small investors and reinforced by news media that are often content to ratify this investor-induced conventional wisdom.”

Readers can weigh the relevance of the point about traders’ hunches to the Robinhood IPO. As for the latter statement regarding the media, we demur; contrary opinion rather than conventional wisdom has been Barron’s credo in the century since its founding.

Write to Randall W. Forsyth at randall.forsyth@barrons.com

Nothing succeeds like excess, as the old quip goes.

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Robinhood is making the wrong kind of people money — that’s the real problem with its IPO filing

The Independent 04 July, 2021 - 07:49am

But then you read the prospectus, in light of the Menlo Park, California-based company’s years of blather about how it is ”democratizing finance,” and any temptation to take it seriously pretty much vanishes. Its prospects for growing fast enough to reward people who buy the IPO still exist, but they get dodgier as you think about it.

The problem with Robinhood is that its actual business model is about subsidizing commission-free trading by accepting payment from bigger companies who want to fill its customers’ orders, in a system called payment for order flow. Basically this means Robinhood sells clients’ orders to hedge funds — 34 percent of revenue comes from Chicago-based Citadel Securities alone — who buy shares on the open market and then mark them up to sell to Robinhood’s retail customers.

To be fair, Robinhood didn’t invent the markets’ spread between “bid” and “ask” prices that Citadel and others are exploiting, and the spreads are usually small, at least in stocks. But it’s still a transfer of wealth from small investors to big ones that’s big enough that Citadel paid about $240 million for it last year. Overall, Robinhood’s fixed slice of spreads between bid and ask prices produced 81 percent of its first-quarter revenue.

In the 10 pages of pictures of small investors that led off Robinhood’s filing, all of them rhapsodize about how that nice Robinhood is helping them out of the goodness of its collective heart. $5 says not one of them could explain payment for order flow. And none of them probably know that the “small fry” benefiting the most from Robinhood is Citadel chief Ken Griffin — Donald Trump donor, owner of the biggest real estate portfolio in Palm Beach, and a man whose $16.1 billion net worth has risen by $3.3 billion since late 2019, according to Forbes.

Payment for order flow is a dodgy enough practice that Congress is on the case. Robinhood CEO Vlad Tenev was called before a House committee in March to be grilled about whether the relationship with Citadel and others led to a suspension in Robinhood’s handling of orders for stock of Gamestop. The Securities and Exchange Commission tightened disclosure rules even under Trump, and will be more active generally under the new administration. Maybe not much will change, but maybe something will.

That’s before you get to the fact that 17 percent of revenue is coming from facilitating trades of cryptocurrency, the fastest growing part of which is dogecoin, “money” that Tesla CEO Elon Musk spent some time pumping on Twitter because he thought its name and logo were amusing.

Let’s just say that if your mission is to educate small investors so they can trade with the big boys without getting hustled, and they respond by piling into dogecoin, a currency initially created as a joke, you might not be getting the job done. After all, dogecoin is down nearly two-thirds from its May peak even though trading it generated more than 5 percent of Robinhood’s first-quarter revenue. And even bitcoin, the closest thing to a respectable cryptocurrency, is off 49 percent in the last three months.

The unkindest thing to say about Robinhood, in the view of its intended audience, is that boomers had its basic idea 20 years ago, and we called it eTrade. Twenty years before that, our folks called it Charles Schwab. Robinhood’s claimed innovation is that it has moved the game to cellphones from personal computers, but the basic idea of exploiting trading deregulation to lower commissions and supposedly level Wall Street’s playing field is so old that it actually dates back to Joe Biden’s first year in the Senate in 1975.

So if you lose your shirt trading doge on Robinhood, say, “Thanks, boomer,” just like you say all the time on the Twitter.

That said, eTrade turned out OK, though you had to ride out a long spell of badness after the dot-com bust of 2000, when its stock, to borrow a phrase from the Trump impeachment hearings, went through some things. It sold to Morgan Stanley last year for $13 billion.

So maybe you’ll make some money on Robinhood, and maybe you’ll go through some things in the crypto bust that logic insists is coming. You can make the case that it’s a nice little company. But you can’t make much of a case that it is changing the world for the better. And that is what startups that last must do.

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