the trading website that transformed the brokerage industry ended its first day of trading with a market cap of $29 billion. While the tumultuous public offering could affect future allocations of IPO stocks to retail investors, it’s not necessarily a negative sign for Robinhood stock.
Shares of Robinhood (ticker: HOOD) opened at their IPO price of $38 and fell more than 12% before bouncing back. They closed Thursday at $34.82, more than 8% below their offer price, leaving Robinhood a broken deal.
At $34.82, Robinhood’s market cap is $29 billion, less than the $35 billion valuation it sought with its IPO.
“The stock price drop doesn’t come as a shock,” said Jay Ritter, a professor at the University of Florida who studies IPOs.
Ritter pointed to
(FB), which has allocated approximately 25% of its shares, worth $4 billion, to retail investors with its IPO in 2012. Robinhood reserved up to 35%, or about $700 million in inventory, for retail.
shares ended their first day almost flat at $38.23. The stock then fell another 50% over the next six months before rebounding. Institutional demand for both Robinhood and Facebook “proved a lot weaker than expected,” Ritter said.
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Several factors put downward pressure on Robinhood’s stock, said Robert Le, senior analyst, emerging technology at PitchBook. Retail investors, unlike institutional companies, tend to let go of their stocks, Le said.
Negative sentiment due to the
(GME) trading controversy, with Robinhood restricting trading of GameStop and several other securities, likely has prompted many retail investors to buy stocks with the intention of selling on day one, Le added. Robinhood employees and directors were also able to redeem 15% of their holdings on the first day. “Today much more was sold than bought. All that together to drive [Robinhood’s] price down,” said Le.
The big impact of Robinhood’s bleak first day is the chilling effect it will have on companies considering allocating large amounts of stock to retail investors, both Ritter and Le said. Allocations to retail investors, including high net worth individuals, have fallen and now hold about 5% to 10% of IPO shares, Ritter said. In future IPOs, corporate and institutional investors will weigh the negative impact retail investors had on Robinhood’s debut, Le said. “It will go back to the old ways of doing IPOs… retail investors will miss out on IPOs,” Le said.
Retail investors have not been very important in the vast majority of IPOs, Ritter said. “They will not remain very important. Institutional investors are the driving force behind the IPO market,” said Ritter.
For Robinhood, the bleak first day isn’t that big of a deal. In the past year, many companies, such as
Zim Integrated Shipping
Academy Sports & Outdoor
(ASO), which traded below their offer prices during their debut and then recovered. There’s also Facebook, which closed Thursday at $358.82, up nearly 843% from the IPO price. A company’s first day has “almost no ability to predict a company’s stock price over the long term,” Ritter said.
Founded in 2013, Robinhood offers commission-free trading in stocks and other investments. The company sends client orders to market makers such as Citadel Securities, Virtu Americas and G1X Execution services. In 2020, 1,281 people were employed.
At the end of Wednesday, the trading start-up raised about $2.1 billion after selling 55 million shares for $38 each, the lowest point of its price range of $38 to $42. according to a statement. Most of the shares, about 52.4 million, came from the company itself. This means that Robinhood has received approximately $2 billion from the offering.
Co-founders Vladimir Tenev and Baiju Bhatt each sold approximately 1.25 million shares, while Chief Financial Officer Jason Warnick sold 125,000 shares, according to the prospectus. Tenev, who is CEO, and Bhatt, who is chief creative officer, will collectively get $95 million (or $47.5 million each) from the sale of stock, while Warnick brought in $4.75 million.
Robinhood has not been without controversy, however. The company has come under scrutiny for its use of Payment for Order Flow (PFOF), which refers to the practice of routing transactions from customers to trading firms that execute the trades and take advantage of the bid-ask spread. About 80% of Robinhood’s first quarter revenue came from PFOF. Critics of PFOF argue that such payments discourage brokers from obtaining the best trades for their clients. The Securities and Exchange Commission Revises PFOF, With Some Believing the practice may be banned.
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