Wall Street didn't exactly roll out the red carpet to welcome Robinhood after its highly anticipated debut.
The fast-growing trading company finished Thursday at $34.82, down 8% from its initial public offering price. Robinhood failed to score the first-day pop that new companies covet.
And that's despite Robinhood pricing its IPO at $38, the low end of the expected range. All of this suggests demand is somewhat lukewarm for Robinhood, a company that has revolutionized the way Americans trade but has also been dogged by controversy.
Only about a quarter of US IPOs have dropped during their first day of trading, excluding blank-check companies, according to Professor Jay Ritter from the University of Florida. The average first-day pop is 33%.
The Robinhood IPO values the company at about $32 billion, making it more valuable than major companies including Nasdaq, Southwest Airlines and Kroger. That's well above the $12 billion price tag Robinhood scored in its most recent round of private funding.
The deal is a major milestone for a company that pioneered zero-commission trading and is enjoying explosive growth.
"It's humbling," Robinhood CEO Vlad Tenev told CNN's Julia Chatterley on Thursday. Tenev, an immigrant from Bulgaria, pointed to how he first arrived in New York City as a five-year-old in the early '90s and began his entrepreneurial career in New York as well.
"Now to be back here after six years since Robinhood's launch, it's really surreal," Tenev said.
The IPO is raising $2.1 billion and Robinhood began trading on the Nasdaq Thursday under the ticker symbol "HOOD."
Robinhood's revenue surged by 245% last year to $959 million as its user growth and trading volume skyrocketed.
"The business has been a juggernaut. They've got a great platform they can build off of," said David Weild, former vice chairman of the Nasdaq who is now the CEO of investment bank Weild & Co.
'It seems rich'
Investors are paying a premium for Robinhood's growth.
At the IPO price, the deal values Robinhood at about 21 times trailing revenue, according to Renaissance Capital. That compares a multiple of just five for Charles Schwab, a rival that is expanding at a slower pace.
"It seems rich — unless the company can keep up this high growth," said Kathleen Smith, a principal at Renaissance Capital, which manages the Renaissance IPO ETF.
Robinhood completely disrupted the online brokerage industry by pioneering zero-commission trading. As the company lured new and existing investors to its platform, rivals were forced to eliminate trading fees and join forces just to survive.
Now Robinhood is disrupting the IPO process. The company is allowing its users to buy a chunk — as much as one-third — of its IPO shares before they begin trading on the Nasdaq. Normally, only corporate insiders and powerful institutions can get access to these coveted shares.
New regulatory probes revealed
Robinhood's public debut was delayed by a series of controversies, from record-breaking settlements to massive outages, that raise questions about the company's business model, management team and ability to keep up with its explosive growth.
Just this week, Robinhood disclosed that regulators are investigating the fact that CEO Vlad Tenev is not licensed with FINRA, Wall Street's powerful self-regulator. (Robinhood has argued Tenev is not required to be licensed because he's the CEO of the parent company, not its broker-dealer arm.)
Asked by CNN if he's tempted to take the FINRA exam just to "shut everybody up," Tenev said Robinhood doesn't think that's "required at this point." When asked if he'd do it when Square CEO Jack Dorsey gets registered with FINRA, Tenev said: "Maybe."
The Financial Industry Regulatory Authority and the Securities and Exchange Commission are also probing whether Robinhood employees traded shares of GameStop, AMC and other "meme" stocks ahead of the trading platform's infamous trading restrictions in January.
Last month, FINRA slapped the brokerage with its biggest-ever penalty and accused the company of harming millions of customers and giving investors "false or misleading information." FINRA cited, in part, options trading procedures at the heart of a recently settled lawsuit filed by the family of Alex Kearns, a 20-year-old Robinhood trader who died by suicide last year.
Robinhood neither admitted to nor denied the FINRA charges.
'Feed fish to sharks'
Rep. Sean Casten, a Democrat who represents the Illinois town where the Kearns family is from, is concerned about the gamification of trading platforms like Robinhood. In an interview, Casten said Robinhood has a huge economic incentive to lure as much "dumb money" as possible and then sell it to "smart money."
"Its business model exists to feed fish to sharks," said Casten, who introduced a bill this week that would require the Government Accountability Office to study the impact of the gamification of online trading platforms.
Asked if Robinhood is mature enough to be a public company, Tenev pointed to improvements made in leadership, customer support, infrastructure and technology.
"You can see how much the company has grown," he told CNN.
Weild, the former Nasdaq executive, said Robinhood's struggles may have only enhanced public awareness about the company — something that, ironically, could help the company. He likened the situation to challenges that faced America Online during its rapid expansion in the 1990s.
"All it did was increase their visibility and branding," Weild said.
'These are not free apps'
But Robinhood's struggles have also shined a bright light on the company's controversial business model, known as payment for order flow. Like some other online brokerages, Robinhood makes most of its revenue by selling its retail order flow to high-speed trading firms like Citadel Securities.
Robinhood argues that this tactic benefits everyday investors because it has paved the way for no-commission trading. But others say it's really the high-speed trading firms that are benefiting — otherwise they wouldn't be paying Robinhood for the order flow.
Now the very business model that Robinhood is so reliant on is in doubt. The Securities and Exchange Commission is reviewing payment for order flow. SEC Chairman Gary Gensler warned in May that there are "inherent" conflicts of interest in this business model and expressed concern about the gamefied nature of trading apps.
"These are not free apps. They are just zero-commission apps. The cost is inside the order execution," Gensler told lawmakers.
If the SEC bans payment for order flow, it would deal a blow to Robinhood and force the company to find new sources of revenue.
Levered to the market boom
Robinhood faces competition from not only well-established online brokerages, but from upstarts like Public.com and Invstr that market the fact that they do not sell retail order flow to high-speed traders.
Smith, the Renaissance Capital executive, said another risk is how closely linked Robinhood's bottom line is to the fate of booming markets.
"What if we get a negative market? People could easily get turned off if they lose money," Smith said. "This company is so levered to equity and crypto markets. A downturn would hurt Robinhood more than a Charles Schwab."
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