Opinion: Three arguments for, and three against, buying Robinhood shares once they start trading after the IPO

There are three good issues and three unhealthy to learn about Robinhood, which will probably be traded on the Nasdaq.

Learn: Why stock-trading apps like Robinhood plus social media are a potent brew for investors

Let’s begin with the three positives.

Development is off the charts

The app is cool and simple to make use of. So … development is superb. Final yr, Robinhood
HOOD
accounts grew 143% to 12.5 million, and income surged 245%. That continued within the first quarter, when accounts rose by 151% to 18 million and income elevated 309%, yr over yr.

Detractors attempt to use this in opposition to the corporate, saying Robinhood’s interface turns investing right into a recreation. However solely folks, not an app, can decide in the event that they method investing as a recreation or not.

Land-and-expand technique

Sensible traders I do know cite this as a key high quality. They search for corporations that get a foothold with clients after which develop by promoting them extra providers. This can be a core technique at Robinhood. Its phenomenal development put the app within the lives of tens of thousands and thousands of younger traders. They’ll want extra monetary providers as they grow old and accumulate wealth, and Robinhood will probably be there to supply.

This implies issues like debit playing cards, bank cards an enhanced stage of service known as Robinhood Gold, automotive loans, IRA and Roth IRA accounts, crypto wallets — and who is aware of what else.

It’s a disrupter

Half of all brokerage accounts opened within the U.S. from 2016 to 2021 have been arrange on Robinhood, the corporate has estimated. That’s a formidable stat, provided that rivals equivalent to stalwarts Charles Schwab
SCHW,
+0.71%
and Constancy Investments aren’t precisely shabby. Greater than 80% of Robinhood’s shoppers come by phrase of mouth, one other information level that tells you Robinhood is disrupting the brokerage world.

Investing in disrupters together with Amazon.com
AMZN,
+0.11%
or Netflix
NFLX,
+0.08%
can repay huge, as a result of disrupters are inclined to carry on discovering new methods to disrupt after their early successes.

Like a variety of disrupters, Robinhood is founder-run. This can be a plus for traders. Founders like Jeff Bezos at Amazon are keen about their companies, and so they preserve innovating even after they’ve made their billions. Buyers go alongside for the experience. Robinhood was based in 2013 by Vladimir Tenev and Baiju Bhatt, and so they nonetheless lead the corporate.

And now, the three negatives.

Retail investing might sluggish

Robinhood will come public with a market capitalization of $37 billion and an enterprise worth of $30 billion (market cap minus web money), assuming it’s priced at $40.

This can be a very wealthy valuation relative to rivals like Schwab and Interactive Brokers
IBKR,
+1.99%.
True, Robinhood is rising a lot quicker — 245% in 2020 in contrast with 12% for Interactive Brokers and 9% for Schwab. To carry the wealthy valuation, Robinhood must sustain the speedy development. It’s not clear this can occur.

“At a $37 billion market cap, a variety of development is baked in. As folks return to the workplace and exit once more and do social actions, we don’t know if buying and selling goes to be as well-liked a pastime,” says Matthew Kennedy, senior strategist with Renaissance Capital, which manages the IPO change traded fund Renaissance IPO ETF
IPO,
+3.39%.
“That’s the main concern.”

True, however to some extent a slowdown in development is already partly priced in to the inventory. Robinhood has instructed traders to anticipate an outright decline in income within the third quarter. Shares of Interactive Brokers have offered off not too long ago on weak steering, and Schwab was hit by this too.

In fact, the actually huge danger is a bear market. Not the sort of temporary selloffs we now have seen this yr, however a nasty bear market — the type that makes folks swear off shares perpetually.

Amongst brokerages, Robinhood would get hit significantly exhausting since a lot of its income comes from riskier areas of buying and selling like choices (38%) and crypto (17%) that can dry up the quickest. In fact, crypto has a lifetime of its personal so it’d proceed to do properly, even in a bear market and recession.

The query is whether or not Robinhood will roll out sufficient different merchandise to diversify income away from buying and selling earlier than the following bear market comes.

Regulators might ding the enterprise mannequin

“Fee for order circulation” are the brand new soiled phrases amongst Wall Avenue critics. Robinhood and different retail brokerages have changed commissions with cost for order circulation from market makers like Citadel Securities. They earn money by skimming fractions off trades.

Critics assume this opens traders to abuse, and regulators are trying into it. “The chance is regulators say ‘I’m taking away 80% of income,’ ” says Kennedy. Robinhood will get about 80% of income by directing consumer trades to market makers.

In my opinion, this mannequin is nice for retail traders as a result of it lets them begin positions step by step with small purchases, and common down on weak point. Within the previous days, retail traders had been extra apt to simply by the entire place within the first swipe to save lots of on commissions.

I feel the tradeoff is value it. Regulators might not agree. Then again, a lot of the brokerage sector now makes cash from this follow, there’s a robust lobbying contingent supporting it.

The Reddit crowd trashes Robinhood

They’re indignant at Robinhood for limiting buying and selling within the meme shares AMC Leisure
AMC,
+2.34%
and GameStop
GME,
-5.28%
when their spikes created credit score danger within the inventory settlement system, earlier this yr. Robinhood restricted buying and selling briefly to maintain the dangers from rising, nevertheless it wasn’t the one one responsible. The chance managers behind the clearance system hadn’t anticipated the loopy strikes in shares, both.

As influential as the varied Reddit buying and selling teams could be, to this point their negativity hasn’t damage Robinhood. Second-quarter development was phenomenal.

In a July 27 submitting, Robinhood mentioned funded accounts grew 25% to 22.5 million within the second quarter, from 18 million within the first quarter. Robinhood additionally put second-quarter income at $546 million and $574 million, a 129% enhance on the midpoint from the $244 million within the second quarter of 2020, and seven.3% sequential development over the primary quarter.

We must always by no means underestimate the ability of the Reddit crowd. But additionally keep in mind that lots of people hated (and shorted) Fb
FB,
+1.49%,
Alphabet
GOOGL,
+3.18%
and Netflix once they first got here public.

And look the place their shares have gone.

Michael Brush is a columnist for MarketWatch. He has a Robinhood account. On the time of publication, he had no positions in any shares talked about on this column. Brush has recommended SCHW, FB, AMZN, GOOGL and NFLX in his inventory publication, Brush Up on Stocks. Observe him on Twitter @mbrushstocks.