Robinhood IPO: Shares Tumble In Trading Debut As Billionaire CEO Defends Meme-Stock Craze - Forbes

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Shares of Robinhood fell as much as 10% within minutes of the online brokerage's long-awaited trading debut Thursday, pushing the company’s market value below $30 billion as the company's billionaire founders lauded the recent explosion of retail trading that ushered in massive growth for the firm—and a slew of regulator scrutiny.

Key Facts

Listed on the tech-heavy Nasdaq exchange under the ticker HOOD, Robinhood shares started trading shortly before 12:30 p.m. EDT, falling nearly 9% by 12:35 p.m. to $34.75, from an offering price of $38 on Wednesday.

The stock price translated to a market capitalization of about $29.3 billion, below a target of $32 billion but more than double the company’s last private market valuation of $11.7 billion after raising $660 million in September.

Menlo Park, Calif. based Robinhood, which posted $959 million in sales last year, raised roughly $2.1 billion with its initial public offering on Wednesday, making it one of the year's largest IPOs, according to financial analytics platform Dealogic.

In a television interview before the stock's trading debut, CEO and cofounder Vlad Tenev defended the frenzied retail trading that emerged in January and helped Robinhood's revenues climb three-fold in the first quarter, saying he thinks "it's a real thing" while acknowledging the uncertainty around the "ramifications of what high retail participation in the markets mean."

So-called meme stocks, says Tenev, have capitalized on the interest by raising funds "that allow them to hire really good management teams... and then build for the future"; the trading interest also helped Robinhood's assets under custody surge to $81 billion at the end of March, from about $19 billion one year earlier.

Crucial Quote

“I think what’s interesting with what we’ve seen in retail investing over the past year is that a lot of these companies have been hit hard by the pandemic,” Tenev said. “It started with some of the airlines and then followed with some of the retailers, some movie chains and brick and mortar. You have the institutions that are basically writing these companies off and then retail investors coming in and keeping them up and supporting them.”

Key Background

Marked by stock-market highs, a surge in retail trading and unprecedented market volatility, Robinhood's past year has ushered in record growth and a rise in regulator scrutiny for the buzzy brokerage favored by at-home investors. The company posted $522 million in revenue during the first quarter, more than 300% above sales pulled in the same period last year thanks to a record rise in retail trading—particularly in meme stocks and cryptocurrencies. Meanwhile, the Securities and Exchange Commission reportedly delayed the company's IPO plans last month after claiming Robinhood repeatedly misled customers about its revenue sources and failed to meet trade-execution standards—a practice that ultimately lost customers more than $34 million over a period of three years. Since December, FINRA and the SEC have both settled charges against the firm for a slew of allegations including failure to exercise due diligence before approving customer accounts and providing false or misleading information to customers.

Chief Critic

"The mounting regulatory risk Robinhood faces makes us concerned that the public may see Robinhood’s stated goal to ‘democratize investing’ as a ruse to lure them into speculative trading and gambling that benefits Robinhood more than the individual investor," David Trainer, CEO of investment research firm New Constructs and a Forbes contributor, wrote in a Tuesday email. He cautions the company's main source of revenue—payment for order flow, which is essentially money made routing trades to market-makers for execution—could be targeted by regulators, thus creating "an alarming risk for investors." SEC Chair Gary Gensler has criticized the practice in recent months, but his agency's yet to lay down any new regulation targeting it. However, Robinhood acknowledged Gensler's comments and any arising action as risks in its IPO prospectus.

What To Watch For

After meme stocks like AMC Entertainment and GameStop skyrocketed and crashed in the first quarter, the Massachusetts Securities Division accused Robinhood of gamifying its platform and steering customers to bad investments, and filed an administrative complaint against the brokerage for allegedly failing to protect vulnerable investors. The ongoing matter seeks to revoke Robinhood's securities license, but Robinhood has denied the claims and countersued, saying the state regulator is overstepping its authority under federal law.

Surprising Fact

After Robinhood placed trading restrictions on many meme stocks in late January, the Department of Justice executed a search warrant to obtain Tenev's cell phone, Robinhood's prospectus filing disclosed this month.