Later this afternoon, Robinhood (NASDAQ: HOOD) shares will start trading on the US market. Should UK investors like me be looking to get a slice of the action? Here’s my take on the latest high-profile tech IPO.
Wait – what is Robinhood?
Robinhood is a stock-broking and cryptocurrency service that’s generated a huge amount of attention in a very short space of time. One of its biggest attractions is that it offers users the opportunity to trade commission-free. Instead, Robinhood makes money via what’s known as ‘payment for order flow‘.
It runs trades through wholesale brokers and receives a fee for doing so. This fee might be incredibly small but, thanks to the sheer number of trades being placed, Robinhood still makes a stack load of cash. In fact, this makes up the vast majority of the company’s total revenue.
This business plan has worked wonders in recent times thanks to the popularity of meme stocks such as GameStop and AMC Entertainment. It’s also why HOOD already has over 30 million users, despite only having been around since 2013.
As a growth-focused investor, Robinhood’s relentless rise grabs my attention. But what are the reasons for not joining the possible scramble for shares today?
Robinhood shares: what are the risks?
#1: Regulatory pressures. Robinhood has already fallen foul of authorities. Only last month, it was fined $70m for ‘systemic failures’. That’s something of a red flag for me, as are concerns over its involvement in the gamification of trading. Things could potentially get a lot worse for the company if the US regulator decides to ban payment for order flow, based on a conflict of interest between Robinhood and its users.
#2: Cryptocurrency concerns. Right now, HOOD makes an awful lot of money from cryptocurrency trading. The issue with this is that this market is very volatile, evidenced by Bitcoin’s rise and fall over 2021 so far. Since there’s no historical precedent here, we have no idea what happens next and whether interest has peaked. This is another potential worry for me.
#3: Frothy valuation. Robinhood shares will likely command a price tag of $38 each as markets open, giving the company a valuation of almost $32bn. That might not sound like all that much compared to, say, Amazon, Microsoft or Alphabet. Even so, it sets Robinhood shares at a very high price relative to the sales it achieved in 2020 ($959m). The higher the cost, the greater investors’ expectations (and the potential disappointment).
#4: Hype. Regardless of whether the valuation is obscene, the best time to buy a company’s stock is usually when no one is talking about it. Clearly, that’s going to be difficult here considering the company’s profile. Nevertheless, it may pay to wait for the reality of being a publicly-listed company to set in. As the performance of Oatly has shown, a lot of IPO optimism can quickly evaporate.Â
Here’s what I’ll be doing
It’s tempting to buy Robinhood shares from the get-go but I’m inclined to hold off for now. Even if the stock surges as the bell rings out this afternoon, I need to be confident that the risk/reward trade-off is suitably enticing if I plan to hold the shares for years rather than minutes.
On balance, I’d say that this isn’t the case here. At least for now.