Later today, shares in the trading and investing app Robinhood (HOOD) will begin trading on the Nasdaq. This is the most eagerly anticipated offering of the year, for sure, but in many ways may be the most interesting for a long time. So what can traders and investors expect?
There is a pattern that is typically seen in high-profile IPOs. The hype around the release leads to unsatisfied demand for the shares, all but guaranteeing early trading at a significant premium to the offering price. Then, as profits are banked and the realization sets in that maybe all those highly paid investment bankers and fund managers who had input when the offering price was set actually know what they are doing, the stock backs off its initial highs. After that pullback, once all the hoopla fades, pricing goes back to fundamentals and stock in a company with real prospects or existing business bounces back.
A good recent example would be Airbnb (ABNB).
ABNB was offered originally at $68 per share. During the first day’s trading, it hit a high of $165, before dropping back over the next few days to a low of $121.50. Then the climb began, and by three months after the stock started trading, it was well over $200.
That pattern is pretty typical for a high-profile launch, and follows a simple logic based on human behavior. However, there are some who doubt this will happen with HOOD. That initial pop on the first day of trading usually comes as a result of interest from retail traders. They are familiar with the company and would have taken stock at the offering price were it available, but the vast majority of shares in most popular IPOs go to institutional traders. That creates retail demand on day one that ensures a pop in the stock and, maybe not coincidentally, a quick, tasty profit for those institutions.
Robinhood is different, which will come as no surprise to anyone familiar with the company.
Their very name is synonymous with the power of the retail trader, so it is only natural that they would try to support their supporters in the IPO. As a result, they have allocated a much higher percentage of their shares than usual to individual investors and users of the app. That is a great move, and one I hope is followed by more companies going forward, but it does create some uncertainty. If that retail demand for the stock has already been met, will there be enough demand to force the stock higher on day one?
If the past actions of Robinhood traders are anything to go by, there certainly will be. They have shown in the past that when retail traders unite, they can be a powerful force. They have also shown a propensity for doing their thing with brands and companies they like in other contexts. That is why GameStop (GME), for example, got their attention. So, support for this offering, even after the high retail allocation, looks likely. If the so called Robinhood traders really get their teeth into this one, though, what may not come is the pullback over the next few days.
That is especially true because the offering was set at $38, towards the low end of the expected range, which surprised some. Usually, that would be an indication of lukewarm interest in the offering but given that the market has been a bit wobbly over the last couple of days, that may not necessarily be true here. For one, the idea of the high retail allocation is to allow their people to share in the profits. The company’s anticipated swing back to a loss in Q2 may have also dampened institutional enthusiasm somewhat, but Robinhood has demonstrated that they can make money, having grown revenue over 300% year-on-year in Q1. That kind of growth is both rare and valuable, so it is possible that this time, there will be pent up demand from institutions rather than individuals, limiting the pullback and maybe even keeping HOOD buoyant for a while.
I certainly hope I am right because we all have an interest in this. This is a unique IPO and Robinhood has stood for the little guy since its launch, introducing a whole new generation to trading and investing. If capitalism is to survive and thrive, it has to benefit everyone and not just a select, elite few.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.