My Top Tech IPO to buy in July
Robinhood Markets, the controversial online brokerage firm that popularized free stock trading, finally filed its IPO documents on July 1. It has yet to set a date for its public debut, but it plans to “democratize” the process by offering 20% to 35% of its IPO shares directly with its own users.
Some investors are probably reluctant to invest in Robinhood after its missteps earlier this year. The platform has restricted trading on hot “memes stocks” like GameStop (NYSE: GME) during the short Reddit-fueled squeeze in late January, which sparked allegations of outside interference from its private backers.
The debacle also highlighted the fact that Robinhood’s “free” trades were actually funded by selling its order flows to market makers and high frequency trading (HFT) companies. So instead of buying stocks on a public exchange, Robinhood sells orders to companies that profit from the bid-ask spread.
Robinhood isn’t the only brokerage to use this model, but its leading role in meme stock madness, its gamification of stock trades, and the suicide of a user linked to a complex options trade in June. latest have all caused investors, analysts and regulators to turn against the platform.
These headwinds could make Robinhood a terrible IPO to invest in. However, I think it’s still more promising than many other recent tech IPOs – and I’d be willing to buy it, for four simple reasons.
1. It’s disturbing
In late March, the number of Robinhood funded accounts climbed 150% year-on-year and 44% quarter-on-quarter to 18 million. Its Monthly Active Users (MAU) jumped 106% year-over-year and 51% quarter-over-quarter to 17.7 million, suggesting that most of its users are actively trading. shares instead of passively holding them.
Most Robinhood users are Gen Zers and Millennials. At the end of March, around 70% of its AUC (assets in custody) were from users between the ages of 18 and 40, with a median age of just 31. At the end of 2020, it tripled its number of users per year. -on the year.
These numbers strongly indicate that Robinhood is fast becoming the default trading app for young investors and new investors alike. This disruptive potential is hard to ignore and should alarm traditional brokerage firms.
2. It grows like a weed
Robinhood’s revenue jumped 245% to $ 958.8 million in 2020. Three-quarters of that total came from transaction-based revenue, including the aforementioned payments for order flow (PFOF). The remainder comes mainly from interest payments on its margin loans and securities lending, as well as subscription fees for its premium tier, Robinhood Gold.
Robinhood’s transaction-based income climbed 322% during the year, while its interest-based income grew 151%. Its average revenue per user (ARPU) rose 66% to $ 108.9. It also made a net profit of $ 7.4 million, compared to a loss of $ 106.6 million in 2019.
In the first quarter of 2021, its revenue jumped 303% year-on-year to $ 522.2 million, while its transaction and interest income rose 340% and 160% respectively. Its ARPU increased 65% year-on-year to $ 137.
But it also suffered a net loss of $ 1.44 billion, down from a loss of $ 52.5 million a year earlier, due to an increase in the fair value of its convertible bonds and bonds in the past. title of the warrants. Much of this charge was linked to new convertible notes issued after the January short squeeze to stay solvent.
But excluding those charges and other one-time charges, it generated positive Adjusted EBITDA of $ 115 million in the quarter, down from a loss of $ 47 million a year ago.
3. It’s a cryptocurrency game
Robinhood also offers free cryptocurrency transactions. Its cryptocurrency AUC grew from $ 414.7 million in 2019 to $ 3.53 billion in 2020, and climbed to $ 11.6 billion in the first quarter of 2021.
In the first quarter, it generated 17% of its total revenue from cryptocurrency transactions, compared to just 4% in the fourth quarter of 2020. More than a third of that revenue came from Dogecoin (CRYPTO: DOGE), one of its seven supported cryptocurrencies.
Robinhood’s growing reliance on cryptocurrencies, especially newer ones like Dogecoin, could be a double-edged sword. However, this also makes Robinhood a more diverse and exciting cryptocurrency game than Square (NYSE: SQ), which only supports Bitcoin (CRYPTO: BTC), and a more secure cryptocurrency game than Coinbase (NASDAQ: COIN), which relies entirely on the volatile cryptocurrency market.
4. The controversies will fade away
Robinhood experiences a lot of growing pains. He was recently fined $ 70 million by FINRA (the financial industry regulator) for his inability to fulfill customer orders during the Reddit-fueled trading frenzy and other loopholes, and he faces additional lawsuits and potential regulations.
However, I believe Robinhood can eventually overcome these challenges. If so, its reputation for “democratizing” finance, simplifying investments, and disrupting traditional financial institutions could shine through and make it one of the most attractive fintech stocks on the market.
The main points to remember
I’m not saying I’m going to buy the Robinhood IPO right away. If its initial valuation is too rich, I will wait for a pullback before nibbling some stocks. But it could still be the most exciting tech IPO of July if it arrives in the next two weeks – and investors who focus on its fundamentals rather than its controversies may well find that it is. is a great long-term investment.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.