Robinhood shares stumbled out of the gate on Thursday, falling sharply in their debut, revealing lacklustre investor demand for the popular app that brought fee-free trading to millions of Americans.
The shares opened at $38 apiece, matching the price the company had agreed to sell its shares at a day earlier, and the bottom of a target range marketed to buyers in its initial public offering. But the shares soon whipsawed, dropping as much as 12 per cent to $33.35 at midday in New York.
The early fall compared to a 39 per cent first-day jump in the shares of the average US IPO this year, according to Dealogic data.
Robinhood, which sold 55m shares, had set a range between $38 and $42 a share. While the hottest tech initial public offerings often price above expectations, Robinhood’s value indicated that investor appetite — particularly from big money managers that can make or break an IPO — was not insatiable for the brokerage’s stock.
More than 49m shares worth $1.8bn changed hands in the 30 minutes after it opened for trading. By 1pm in New York, Robinhood was among the most actively traded stocks in the US, surpassing the likes of Apple and Tesla by number of shares traded.
The $38 opening trade gave Robinhood a valuation of $32bn, putting it in the orbit of other large brokers like ETrade, which had an $11bn equity valuation when it was bought by Morgan Stanley last year. Private investors last August had valued Robinhood at more than $11bn.
Bankers at Goldman Sachs led the IPO. As they began an auction process to establish the price of the first trade on Thursday signs of the lukewarm reception for Robinhood quickly emerged. The first indications were for the stock to open at $42, but that drifted lower as bankers worked to gauge demand for the shares.
California-based Robinhood has become a venue of choice for many first-time stock investors, offering commission-free trades that it encouraged with rewards, bonuses and push notifications. With a median age of 31, its customers are often younger and have smaller account balances than those of established online brokerages such as ETrade, Schwab and Fidelity.
It has recorded explosive growth, doubling the number of accounts on its platform since the start of the year to 31m.
However, Robinhood has also come under fire from regulators for the game-like features on its app, limited customer service and dependence on a controversial practice of selling trades called payment for order flow. In June, the Financial Industry Regulatory Authority fined Robinhood $70m for causing “widespread and significant harm” to customers. It was the biggest penalty ever issued by Finra.
On July 26, Finra opened another investigation into the brokerage over compliance with registration requirements, including whether co-founders Vlad Tenev and Baiju Bhatt failed to register with the regulator, according to an updated prospectus from the brokerage.
The offering allocated up to 35 per cent of shares to Robinhood’s own customers. Modest appetite for the IPO suggested investors were not immune to the recent scrutiny of the company, as well as concerns about how the brokerage would sustain its high trading volumes in a post-pandemic world in which people have time for other pursuits.
Tenev declined to comment on whether the retail allocation had been fully subscribed in a Thursday morning interview with CNBC but said it will be “one of the largest allocations ever,” providing Robinhood users with access to “what was once reserved for the 1 per cent or the super-wealthy.”
Robinhood’s offering paves the way for a windfall for its executives and investors. At the opening trade Bhatt and Tenev’s shares were worth $3bn and $2bn, respectively.
Index Ventures, the company’s largest outside investor, has a stake worth $3.2bn.
Robinhood’s extraordinary growth has periodically led to technical outages during periods of elevated volume. During a meteoric rise in shares of the meme stock GameStop in January the platform had to suspend trading and raise billions of dollars to meet capital requirements to market makers.
Investors that provided the $3.5bn in emergency funding stand to receive shares at a 30 per cent discount to the offering price, as their debt converts into equity.
Bhatt and Tenev will retain majority voting control over Robinhood through a dual-class share structure, meaning they will have a minimum of 65 per cent of the voting rights despite holding under 20 per cent of the company’s shares.
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