Online trading platform, Robinhood, best-known in the UK for its role during January’s Reddit-inspired short squeeze, is set to list on the Nasdaq today – but regulatory and revenue concerns may dissuade investors from buying in.
Earlier this year, the firm was used by an army of investors using the online forum Reddit to bid up the share prices of US companies AMC and GameStop, but experts have warned that the platform may not get the same optimism when its shares launch on Wednesday.
A principal concern is the high valuation for its shares. According to some reports, the firm could be valued at $35bn (£25.2bn), with institutional investors buying shares on the exchange within the range of $38 - $42 per share.
This valuation is based on the past 12 months of revenue – $1.4bn based on a price-to-sales – akin to the price of US platform TD Ameritrade in 1999.
However, the company has increasingly come under the regulatory spotlight which could compromise revenue growth and impact its potential as an investment.
Namely, the way in which the platform makes money is of concern, with around 81% of its revenue coming from payment for order flow (PFOF), which routes customer trades to firms that then pay Robinhood a fee. Over the past year Robinhood made $720m from payment from order flow.
This is in direct contrast with its name, which implies that the firm takes from the rich to give to the poor, as market makers profit from the company’s users.
The US regulator, the Securities and Exchange Commission (SEC) is likely to increase scrutiny over PFOF given that it can prevent investors getting the best price for their trades.
At the end of June, the Financial Industry Regulatory Authority (FINRA) fined Robinhood a record $70m for what it described as “widespread and significant harm” to investors.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown said that if rules do change, this could be a big worry for the firm’s revenues and future investors in the company.
“It was enough for Robinhood to highlight a potential ban on payment for order flow as a key risk in its prospectus,” she said.
“But if it can square these issues, or if the SEC decides not to change the current rule book, the groundswell of support among day traders the company has already gathered could potentially accelerate.”
Flouting normal practise
Less conventionally, the retail-trading platform will also sell a third of the shares to its customers.
Danni Hewson, financial analyst at AJ Bell said that it’s the most highly anticipated IPO of the year and the decision to “flout normal practise and offer a third of shares to everyday investors has only added to the frenzy.”
Selling a third of its stock to retail investors is at odds with the usual 1% or 2% usually available on the first day a company sells its shares.
Guy de Blonay, manager of the Jupiter Global Financial Innovation fund, said that this puts its customers on an equal footing with Wall Street insiders, “a move aimed to help Robinhood rebound from a year of bad press.”
However, he added that while the company is an impressive growth story, investors have to be comfortable with its revenue sources and the impact of regulatory risk on the implied market value.
Hewson said that there are clear issues over profitability too, and while the company was briefly out of the red last year, it was only by $7m.
She added: “There’s concern about its business model and how clever it’s been in attracting new investors, getting them to buy into the hype but not the due diligence prudent investing requires.”
Hewson also spoke of the IPO “pop” – or the perk of being in at the start of the game. However, UK investors will have to wait until it starts trading as the IPO is only available to Robinhood customers.
“Robinhood’s users are super engaged, logging in on average a whopping seven times a day, itchy for action,” she said. “There’s speculation they’ll bring increased volatility to the share price as they look to make a quick profit and could put off traditional investors.
“The hype will no doubt bring a bumper bounce at the beginning but in the long run there are big issues.”