Is Robinhood A Buy At $38: A Look Under The HOOD

Robinhood HOOD was priced last night at $38 a share, at the lowest end of the firm's target range, valuing this renegade trading platform at $32 billion a share. HOOD had trouble finding matching bids for its offers before this stock went live on the exchanges, and it ended up opening at its $38 IPO price and trading down almost immediately out of the gates.

This opening price gave the firm a P/S of 23.6x, which is extraordinarily rich for a brokerage firm. Compared to its biggest publicly traded competitors, Interactive Brokers IBKR & Charles Schwab SCHW, trading at 2x & 8.1x, respectively. This divergence in valuation multiples partially reflects these platforms' ability to capture this tidal wave of new retail traders over the past 1.5 years, but it's also a reflection of what some believe Robinhood could become.

According to CEO Vlad Tenev, Robinhood stands for the next generation of consumers that continuously challenges the status quo. Vlad wants the transform Robinhood from just a mobile trading application to the world's best money app. It is unclear precisely what verticals will be added to make this happen, but Vlad has a dream, and the additional $2 billion it raised in the public markets today may be invested in new revenue drivers.

Analysts, investors, & traders have polarized opinions about this IPO and whether Robinhood's growth outlay justifies its rich valuation.

Robinhood has exhibited incredible growth amid the retail trading frenzy in meme stocks like GameStop GME and AMC AMC, driving unprecedented volume on this Millennial and Gen Z-powered trading platform. This stock will be valued on its future cash-flows, but its growth figures have been skewed by the pandemic and the resulting retail trading mania. Robinhood's net funded accounts, assets under custody, and revenues have soared by 331%, 473%, & 870%, respectively, since 2019.

The growth figures that Robinhood is touting in this initial SEC filing are unbelievable, but they are also not sustainable. Options and cryptocurrencies made up 38% & 21% of its topline, respectively. These two revenue drivers will curtail as market volatility normalizes. I wouldn't be surprised if we saw a quarter-over-quarter topline decline in upcoming earnings reports.

Robinhood has been the bane of short-sellers everywhere, with a new cohort of social media traders utilizing this revolutionary trading platform to squeeze unsuspecting short-sellers. The company continues with its market-disrupting strategy, setting aside as much as 35% of its IPO shares so small retail investors can get a piece of a pie that is typically reserved for institutions.

The IPO market has cooled off quite a bit since the beginning of the year as risk appetites begin to diminish in this maturing bull market. In 2020 the average IPO saw a 40% swell from the offering price to its opening trading price.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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