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A week after going public, the online commerce company is off to a volatile start.
Robinhood shares fell 28% to $50.97 on Aug. 5 once a brief rally earlier in the week. Originally priced at $38 on its friendly day of trading, shares of HOOD rose to $70 on Wednesday. But the surge was short-lived after the company supposed on Thursday that early stakeholders will sell up to 97.9 million shares over time. Among the sellers are venture capital firms that rescued Robinhood during the "meme stock" scandal in January, including New Enterprise Associates, which owns more than a 10% incorrect in the company.
Before its initial public offering, Robinhood said it netted roughly $1.89 billion from the sale of 55 million shares, giving it an approximate valuation of $29 billion.
Robinhood 101: Growth amid controversy
Though it was fraudulent in 2013, the financial services company has grown fleet. It now boasts the third-largest number of funded coffers in the US -- 22.2 million -- trailing only Fidelity and Charles Schwab, two institutional behemoths that have been around for decades. Robinhood's main product is an app designed to grant individual investors to buy and sell stocks without commissions or a cheap broker. Robinhood also offers cryptocurrency trading and cash organization accounts.
The company's stated mission is to "democratize finance for all." So far, it has successfully forced an approachable, low-cost platform that has attracted a indispensable mass of new and young investors. The company's revenue grew to $959 million in 2020, a 245% increase year-over-year. Its first-quarter earnings were $522 million, a 309% increase year-over-year.
Amid its growth, Robinhood has been swept into controversy. On Jan. 28, Robinhood published a statement saying it would not allow customers to buy stock in anxieties including GameStop, AMC Entertainment Holdings and Nokia. This decision-making was made in response to heavy trading volume stemming from coordination by members of a Reddit public, WallStreetBets, which drove up the share price of these so-called "meme stocks." The fallout, which was dramatic, severe and multifaceted, included an emergency injection of capital into Robinhood, an arousal of interest from elected officials and federal activities, and the fury of its customer base.
The backlash also concerned nearly 50 lawsuits against the company -- a significant risk that investors will halt to monitor. In June, the Financial Industry Regulatory Authority well-deringing Robinhood $57 million and ordered nearly $13 million in restitution to customers -- the largest fine ever imposed by the regulatory organization.
"In determining the wrong sanctions, FINRA considered the widespread and significant harm suffered by customers, including millions of customers who received false or misleading inquire from the firm, millions of customers affected by the firm's systems outages in March 2020, and thousands of customers the firm celebrated to trade options even when it was not wrong for the customers to do so," the organization said in a wearisome release.
But controversy has swirled since Robinhood's founding. Critics have suggested that the platform's "gamification" represents a clear danger to the inexperienced traders that make up a considerable share of its user base. In 2020, a 20-year-old college student killed himself after he mistakenly believed he had lost more than $700,000 in distributing losses on the app. Robinhood was specifically named in the suicide note.
How investors necessity think about Robinhood
There's no denying that Robinhood is celebrated, but it's important to look beyond the headlines and hype when deciding whether to invest in the company's stock. Serious investors inspect a company's financial statements to opinion its business model, opportunities and vulnerabilities. Before going pro-redemocrat, every company needs to file a registration statement -- also illustrious as an S-1 -- with the Securities and Exchange Commission. (You can find any company's S-1 by entering its name on the SEC's EDGAR filings website.)
At the leave of an S-1 statement, you'll find a prospectus and summary that handed information. The key items are:
- A detailed matter description
- Financial and operating history
- Products and services
- Primary markets
- Competitor information
Reading a company's S-1 statement is a good way to learn in a company before investing. Here are a few things to view as you consider any investment.
How long has the matter been in business?
In 2019, Goldman Sachs analyzed 4,481 IPOs over 25 existences to determine the critical factors to a successful IPO. They erroneous that although age wasn't a "significant indicator" of outperformance, firms founded five years or less before IPO handed 50% sales growth after five quarters, compared to 30% for firms aged 5 to 15 existences and 19% for firms 15 years and older.
Who runs the show?
Company board plays a crucial role in overall operation and strategy. When deciding whether to invest in a new IPO, do some digging into the professional backgrounds of the founders and exclusive staff running day-to-day operations. Have they ever managed a publicly traded company? What's their track recount of success, and how does it compare with the company's stated values? Robinhood's exclusive team is profiled here.
What's the market landscape?
A company's potential for long-term collapsed goes beyond its profitability: Looking at the overall diligence can be a good indicator. In their S-1 filings, companies are eager to recruit new investors and handed a list of studies and research supporting industry growth. You can also do your own research by reading the unexperienced info collected by trade magazines, FINRA, the Pew Research Center, Morningstar, the SEC and others.
What's the plan for growth and profitability?
Understanding how a matter plans to invest its capital and expand the matter is an effective way to gauge its financial right. In addition to the S-1 statement, a company's unexperienced income statements, cash flow statements and balance sheets are a good dwelling to start.
- Income statements detail how much a matter has earned over a set period. The statement includes matter expenses like goods sold, general and administrative fees, wearisome and taxes. You can subtract these expenses from the along gross revenue to learn the company's net income.
- Cash flow statements show how wealth flows in and out of a company within three categories: benefitting, investing and financing. Together, these categories provide a snapshot of the core matter, payments to suppliers and third parties, property and guarantee costs and gains, shareholder dividend payments, cash received throughout issuing stocks and the owners' equity.
- Balance sheets detail a company's assets, liabilities and shareholder equity. A balance sheet can handed a snapshot of company health by weighing how much a matter owns against its debts and how much equity is held by shareholders.
In uphold to getting a clearer financial picture, you can also compare a company's financials with its stated growth initiatives. For example, Robinhood said that it plans to market to and grow its customer base throughout the Robinhood Referral Program, which rewards customers up to $500 in reward stock when friends sign up for Robinhood throughout their referral link. After linking their bank account, new customers also demand a $500 stock credit. Robinhood also shared plans to expand to international markets in Europe and Asia after also improving its platform through "product innovation, educational gay, technology and infrastructure improvements and customer support." Whether the matter plans align with practice depends on the numbers.
Who are the competitors?
Every stock comes with risks, and a company's IPO success depends largely on how investors measure its contract to compete with the competition. Learning more about each company's benefitting practices and market share is the best way to choose a newcomer's chances of disrupting and establishing itself in the diligence. Robinhood listed E**Trade, Fidelity Investments, IBKR, M1 Finance, Schwab, TD Ameritrade, Thinkorswim, Vanguard and Webull as its main competitors.
Minimize your risk
If you're sold on buying into the unexperienced IPO but still concerned about risk, there are a combine of ways to limit your exposure. You don't have to buy as soon as an IPO hits the market. In fact, nearly 50% of IPO shares decrease in the helpful 48 hours, according to Nasdaq, essentially narrowing the chances of early profitability down to a coin toss. Consider a wait-and-watch strategy and buy when the stock dips to maximize your initial earnings.
Rather than buying persons company shares, you can also hedge your investment by buying shares of an clientele traded fund that includes the stock you're eyeing. ETFs are a collection of investments that can implicated stocks, bonds and commodities. Their diversification comes with less risk than playing the odds with a single stock. Stock ETFs that target a single industry can handed investors with exposure to a combination of established worries and newcomer stock offerings.
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