Yesterday, US share-trading firm Robinhood (NASDAQ: HOOD) listed on the NASDAQ via an Initial Public Offering (IPO). While the listing was highly anticipated, it wasn’t as successful as some other recent IPOs. Robinhoodâs share price tumbled nearly 10% in early trading and ended the day well below the IPO price of $38.
Here, Iâm going to look at the investment case for Robinhood. Should I buy the stock for my portfolio?
Robinhood: the business
Founded in 2013, Robinhood operates a trading app that enables users to trade shares, crypto, and options commission-free. The company â whose mission is to democratise finance for all â believes the financial system should be built to work for everyone.
Since its app launch in 2014, Robinhood has grown rapidly. Its growth has been particularly strong since early last year, due to Covid-19 lockdowns and the ‘meme stock’ craze of early 2021. Today, it has around 22.5m users, making it the third-largest US brokerage company by funded accounts, behind Fidelity and Charles Schwab.
At Robinhoodâs IPO price of $38, the companyâs market capitalisation was around $32bn.
Robinhood stock: the bull case
There are several things to like about Robinhood from an investment perspective, in my view. Firstly, the company has a strong brand and a popular product. Its app isnât perfect (Robinhood has a 1-star rating on Trustpilot) but it’s very popular with Millennials. In the US, it has been a game-changer for share trading.
Secondly, the company is generating strong growth. In its prospectus, Robinhood estimated it will achieve second quarter revenue of $546m-$574m, up from $244m in Q2 2020. In the first quarter of 2021, revenue surged 309% to $522m, from $128m a year earlier.
Third, Robinhood operates in a growth industry. People are realising that they need to save and invest more for the future. In the years ahead, the FinTech industry is only going to get bigger.
The bear case
But I also have some concerns in relation to Robinhood stock. One is in relation to the companyâs business model. Robinhood makes the bulk of its money by selling client orders to institutions. This is called ‘payment for order flow.’
This practice is coming under scrutiny from regulators because, often, customers don’t get the best prices for their trades. Some people believe US regulators could ban this business model. This adds risk to the investment case.
Another issue is the design of the app itself. Many people are concerned that it âgamifiesâ investing. Billionaire investor Warren Buffett has criticised it, saying it caters to the gambling instincts of investors. Buffettâs pal Charlie Munger has called it a âgambling parlor.â I think regulators may target this element of the business.
A third issue is that the companyâs growth could slow down significantly as the world reopens and people go back to work. In its prospectus, the company said it expects revenue for Q3 to be lower than Q2 as a result of decreased levels of trading activity.
Finally, thereâs the valuation. Robinhoodâs revenue last year was $959m. That means its trailing price-to-sales ratio is around 30, which is high. By contrast, Schwab’s price-to-sales ratio is about 12.
Should I buy Robinhood shares?
Weighing everything up, Iâm going to keep Robinhood shares on my watchlist for now. All things considered, I think there are better growth stocks I could buy.