Retail trading platform Robinhood Markets, Inc. saw its popularity soar in 2020. The pandemic brought a flood of new consumers flush with stimulus cash. And the commission-free investing app found itself awash with new sign-ups. Rumours of an initial public offering prospered, and it rolled into 2021 on a high.
Twitter, TikTok and a tranche of app entrepreneurs promoting the ease of investing brought many more new customers to Robinhood. Then then came the rise of the meme stocks and the race to retail riches was on. This highly entertaining week of stock market chaos began around January 22 and carried on through the following week.
An online stock discussion board on Reddit called WallStreetBets was rallying the masses to buy shares in GameStop (NYSE:GME) and a few others (AMC Entertainement, Palantir, BlackBerry). The stocks were being bet against by short sellers and the WallStreetBets crew wanted to rise up against them. As the hype caught on and these share prices steadily rose, speculative retail traders waded in on the action. In turn, Robinhood enjoyed record levels of new customers signing up to the platform.
A sharp reality shock
But then things turned sour. As the GameStop share price soared and it wiped hedge funds out, Robinhood halted buying of the stock (and a few others). But controversially, it allowed the shares to still be sold. This created panic and many of the investors lost their nerve, selling their stock, causing the price to plummet.
In response Robinhood received huge backlash, with calls for the platform to be cancelled and the founder Vlad Tenev to resign.
While the initial backlash seemed certain to spell the end for the Robinhood platform, it quickly transpired it’s got first mover advantage in every sense. And the controversy did nothing to weaken its brand recognition.
The news wasn’t just big among wall street and investing communities. Celebrities were wading in on the debate, followed by politicians and the mainstream media. All this free coverage gave Robinhood a new level of notoriety and a surge in potential new customers.
Greg Martin, managing director and co-owner at Rainmaker Securities said:
“From a brand recognition perspective, who doesn’t know who Robinhood is? Despite some positive and negative press, everyone in the world knows who Robinhood is. They couldn’t have better free advertising.”
According to estimates from JMP Securities, Robinhood could have gained 3 million users last month alone. Which sounds feasible considering Vlad Tenev, co-founder and CEO of Robinhood Markets, Inc. tweeted, that in January and February, Robinhood welcomed 6 million new customers to its crypto arm. That’s more than all its crypto signups in the whole of 2020.
Is a Robinhood IPO imminent?
According to sources, and reported by Bloomberg, Robinhood’s management has allegedly held discussions this past week with underwriters regarding moving forward with a potential filing “within weeks,”. This is still in the rumour stage and no definite or final decision has been confirmed including the timing of the IPO. But rumour has it that the IPO could take place this month.
During an investment round last year, the company was valued at around $11.7 billion.
However, it’s since succeeded in securing further funding this year that’s expected to convert to equity at IPO. A first instalment is anticipated to convert at roughly a $30 billion valuation or a 30% discount to the public offering (whichever amount is lower). With the second instalment at the lower of the 30% IPO discount or a $33 billion valuation, Bloomberg confirmed.
Too big to fail?
While, the company has to face up to the realities of operating such a large enterprise at the behest of the public, while appeasing those powerful wall street backers, it seems it’s well placed to do so.
With its user growth and valuation on the up, the company looks in many ways to be in a stronger position than it was a year ago. In response to the trading halt, the government called for Tenev to testify before the US House of Representatives Committee on Financial Services. This is part of his statement:
“Robinhood opened up the markets to millions of retail investors. I want to be clear at the outset: any allegation that Robinhood acted to help hedge funds or other special interests to the detriment of our customers is absolutely false and market-distorting rhetoric. Our customers are our top priority, particularly the millions of small investors who use our platform every day to invest for their future.”
The Bulgarian-American billionaire entrepreneur went on to say:
“We have since taken steps to raise $3.4 billion in additional capital to allow our customers to resume normal trading across Robinhood’s platform, including trading in the stocks we restricted on January 28.”
Friends in high places
The unprecedented surge in trading activity caused by the GameStop run, led Robinhood to almost run out of credit. Raising the additional $3.4 billion at such short notice was necessary and impressive. It shows the confidence in its platforms and friends in high places. This allowed Robinhood to post the necessary collateral with the Depository Trust & Clearing Corp., the industry’s clearinghouse.
Apparently demand for Robinhood shares in private markets is surging. And to appease its loyal customers, it’s reportedly considering selling some of its shares in its IPO directly to its own users. This could be a seriously impressive publicity stunt, that could go a long way to repairing trust. In usual circumstances, retail investors don’t get the opportunity to buy new listings until they’ve launched at IPO. In the past year this has resulted in many stocks launching to a much-inflated price. While this doesn’t always lead to losses, it comes with considerable risk.
As shares in GameStop and other meme stocks continue to endure share price volatility and inexplicable price surges, Robinhood will need to keep its customers happy. But so far it’s proven that even bad publicity can be good.