Robinhood transformed the stock market for many everyday traders, popularizing zero-commission trades and making day trading and cryptocurrency a suddenly hip hobby for millions of Americans. In recent years, the trading app has seen tremendous growth and become a significant part of the investing news cycle. But the favorite of young investors has also faced its fair share of criticism, from how the company makes money to how it’s made investing akin to gaming.
Now, all the highs and lows of Robinhood’s journey are culminating in an upcoming initial public offering (IPO), when most investors will be able to buy stock in the company.
Should you invest in Robinhood when it goes public? Here’s everything you need to know about the company’s IPO.
When is Robinhood’s IPO?
Robinhood filed the paperwork necessary for an IPO to the Securities and Exchange Commission (SEC) back in March. The company is keeping the IPO confidential, meaning that it can keep sensitive details a secret from competitors, employees and customers until closer to the date that it goes public, and may have a more flexible timeline.
The company is targeting July for its debut on the public market after scratching its initial plans to go public in late June, Bloomberg News reported. However, the decision isn’t final and plans could still change.
Why is Robinhood so popular?
Vlad Tenev, Robinhood CEO, founded the Menlo Park, California-based company with Baiju Bhatt in 2013. Since then, the trading app has seen explosive growth, with more than 13 million users as of 2020.
The company — named for its goal to “provide everyone with access to the financial markets, not just the wealthy” — got a surge from the pandemic as people turned to investing in lieu of going out and sports betting. There was also the GameStop mania in January, when investors who gather on Reddit used apps like Robinhood to jack up the price of the video retailer’s stock. Citadel Securities estimates that individual investors’ trading activity doubled from an average of 10% in 2019 to 20% in 2020, The Wall Street Journal reported.
And in the first quarter of 2021, Robinhood raked in $331 million from what is known as payment for order flow — its biggest source of revenue — in which the company makes money off of high-speed traders to whom it routes customers’ orders. That’s more than triple the $91 million brought in during the first quarter of 2020.
Sill, while many investors have discovered Robinhood while stuck at home during quarantine, the company has been building its cult following for years, says Peter Hobson, vice president at research firm Third Bridge. It’s largely due to Robinhood’s effort to pioneer commission-free trading in individual stocks. Improvements in the user experience on investing apps helped too: Investors can now buy stocks easily right on their phones.
Of course, to be successful post-IPO, however, Robinhood needs to continue to grow.
There is a shift away from traditional banks and towards financial services and financial technology (fintech) companies underway, and Robinhood could lean even more into this trend, Hobson says. For example, the company could add ancillary financial services to support the main trading platform, similar to how the peer-to-peer payment service Cash App added a stock-trading and Bitcoin offering.
The company could also look to expand internationally, like taking another stab at the U.K. launch Robinhood cancelled last year. Regulation internationally, though, could be a tough roadblock — just look at China’s recent crackdown on cryptocurrency.
Is Robinhood stock a risky investment?
Robinhood has already faced scrutiny from regulators and lawmakers. Massachusetts regulators are looking to revoke the company’s license, saying that the trading app encourages investors with little experience to take on big risks.
The company has long faced criticism for “gamifying” investing with an interface that resembles a video game, animated celebrations for milestones and free stocks for referring friends. (Earlier this year, the platform removed digital confetti — which users saw after firsts, like their first trade — from the app in light of the criticism.) Even the investing legend Warren Buffet took a swing at Robinhood, saying that the company had been a significant part of the gambling aspect of the stock market we’ve been seeing recently.
Robinhood has also faced backlash from lawmakers for curtailing users’ abilities to trade GameStop and other meme stocks earlier this year. Sen. Elizabeth Warren D-Mass. called on the company to explain why they stopped their customers’ trading. Rep. Alexandria Ocasio-Cortez, D-N.Y. called the move “unacceptable,” and some on the other side of the aisle, like Sen. Ted Cruz, R-Texas, agreed. In the face of regulatory issues, Robinhood has recently built out its legal team, including bringing on former SEC commissioner Dan Gallagher as chief legal officer.
In addition to criticism of Robinhood’s bells and whistles, there are questions about its fundamental business model: How does Robinhood actually make money? Yes, Robinhood is technically “free” in that you don’t pay a fee for the trading service. But its main source of revenue — payment for order flow — is a controversial way for middlemen like Robinhood to profit from market makers for customers’ orders. It’s not even allowed in the U.K. and Canada. The SEC fined the company in December of 2020 for misleading users about how it makes money this way, and it’s likely more regulators and lawmakers will be asking questions as an IPO approaches.
What are Robinhood alternatives?
Robinhood may have popularized commission-free trading for individual stocks, but competitors soon jumped on the bandwagon and now the practice is the norm, including among traditional brokerages like Charles Schwab and Fidelity. As other trading platforms catch up to what works and what doesn’t, Robinhood is losing its lead over competitors, says Paul Rowady, founder and director of research at Alphacution.
And Robinhood has a wide range of competition. There are the traditional brokerages, like Schwab and Fidelity, that have financial products beyond just an investing platform, including bank offerings and financial planning. And they’re only growing: Schwab recently bought TD Ameritrade while Morgan Stanley bought E*Trade.
Then, there are small trading platforms, like Webull, which are trying to attract many of the investors Robinhood has its eye on.
There are also financial services products adding offerings that made Robinhood unique — think, again, of Square’s crypto trading via Cash App — and crypto-specific platforms like Coinbase.
Should I invest in Robinhood the IPO?
Robinhood’s growth has been impressive — but it might also be more than the company can handle, Rowady says. He points to operational issues, like Robinhood’s notoriously bad customer service.
“They conceived a Frankenstein’s monster, and now the thing is out of the laboratory,” Rowady says. “They’re a little bit of a victim of their own success.” (Robinhood declined to comment on Rowady’s characterization.)
On top of dealing with the regulatory issues that stem from this growth, Robinhood also faces a daunting question: Can the company maintain its growth? Analysts will be looking at whether the company continues to attract new users in the absence of COVID-19, as well as if the trading activity holds steady or starts to trail off as people head back to work and there are no more stimulus checks. (Individual investors’ activity has already started to slow.)
To be fair, Robinhood does continue to add new offerings. Most recently, it began allowing users to trade companies’ IPO shares, something retail investors typically don’t have the chance to do until a company is already listed on an exchange.
It’s important to take all this — the success and the struggles — into account when determining if Robinhood will fit into your portfolio.
How to buy Robinhood stock after the IPO
In order to invest in Robinhood, you’ll need a brokerage account via one of the many platforms we’ve listed.
Then, investing in Robinhood will be pretty straightforward once it’s actually listed on the exchange. But be wary of investing too much in one individual stock. Financial experts recommend turning to mutual funds or exchange-traded funds to lower the risk that comes with relying on one company’s performance. If you do choose to invest in individual stocks, like Robinhood, financial advisors recommend keeping that risky part of your portfolio small, no more than 5%.
And keep in mind that there are risks with investing in a company right after it goes public. Often, the stock’s price will skyrocket once all investors can buy it, benefiting those that were able to get pre-IPO access (typically institutional and wealthy investors) and causing everyday investors to pay more than they normally would.
Cryptocurrency exchange Coinbase, perhaps this spring’s hottest IPO, saw its stock open at $381 on its first day on the exchange and is now trading around $240.