Jul. 28, 202114 min read

Should You Buy HOOD Stock? Expert Warns About the IPO, Robinhood Faces New Regulatory Hurdle

Written by Staff
  • Robinhood to debut on the Nasdaq Thursday under ticker $HOOD…
  • Experts warn about “dilution” in the IPO…
  • Regulators zero in on CEO Vlad Tenev…

As Robinhood gears up to price its IPO, controversy is swirling around the stock trading platform. 

The stock is expected to be priced around $40.00 per share today and begin trading on the Nasdaq under the ticker HOOD on Thursday.

That pricing would value the company at more than $30 billion. 

This IPO is unique as retail traders will get a chance to buy in before trading officially begins, something that’s usually reserved for big-time investors. 

About one-third of the shares in the IPO have been reserved for Robinhood’s 17.7 million users.

Robinhood says its mission is to “democratize the market”, but the company itself has been shrouded in controversy leading right up to this public debut. 

But experts are warning that 30% of shares for users isn’t as rosy at it sounds. 

Sounding the Alarm on HOOD Stock

Christopher Bloomstran, President of Semper Augustus Investments Group LLC, took to Twitter on Tuesday to summarize the company’s S-1 and give his take on why this IPO may not be a great buy for retail investors.

Bloomstran made a comparison to the app’s namesake, Robin Hood.

And self-made millionaire trader, educator, and philanthropist Tim Sykes agrees. “I like to joke that Robin Hood, historically, has been known to take from the rich and give to the poor,” Sykes told StocksToTrade. “But Robinhood the broker, with their deals with Citadel, with their shady business model, they’re really partnered with Wall Street and hedge funds and making a ton of money off the lowly poor people who think they’re getting in free.”

Although Robinhood touts its IPO as giving access to the little guy, Bloomstran highlights the low level of power retail investors will actually get if they buy in. 

He says the company will raise $2.3 billion from new shareholders in the offering, which represents almost 30% of all capital raised since 2013. 

But those new investors will only own a measly 7% of the company and will have “far less voting rights”. 

Bloomstran also raises concerns about when most of Robinhood’s capital has been raised. 

Remember, Robinhood says it’s reserving 25–30% of the shares in its IPO, or 13 to 16 million shares, for its users. 

Bloomstran says if those shares were priced at the midrange, $40 per share, it would raise $500 million to more than $600 million. 

“Rob from the fools, give to the poor insiders.”

But Bloomstran’s biggest issue about this IPO is dilution.

He points out the S-1 filing shows $2.55 billion in tranche 1 convertible notes outstanding which will be exercised at the lower of 70% of the IPO price. 

There are also $1.03 billion in tranche 2 convertible notes outstanding, to be exercised at the lower 70% of the IPO price as well. 

Both tranches of those notes were sold in February 2021, so holders have owned them now for just 5 months. 

If the IPO prices at $40 per share, the convertible notes would convert to Class A common stock at a cost of just $28 per share. 

That’s an automatic gain of 42.9%.

“Quick. Free. Money” according to Bloomstran. 

On top of the converts, there are also 369 million outstanding warrants which were issued to purchasers of the convertible notes.

Those are also exercisable at 70% of the IPO price.

Robinhood’s S-1 warns, “A large number of RSUs will vest in connection with this offering, and we may expend substantial funds in connection with the tax withholding and remittance obligations related to the settlement of RSUs and/or the exercise of outstanding stock options depending on the manner in which we fund these liabilities, which may have an adverse effect on our financial condition and results of operations.”

RSUs are “restricted stock units” that are not fully transferable until certain conditions are met. 

There are two different types of RSUs included in this IPO, market-based and time-based.

For Bloomstran, this is another fast money deal. 

The filing also shows 27.8 million shares of Class A common stock “reserved for future issuance under our 2020 Equity Incentive Plan”.

Bloomstran says that’s $1.1 billion set aside for insiders.

Next on his list of problems with the Robinhood IPO, is the massive valuation of the company. 

In 2020, Robinhood had total revenue of $959 million. 

In the first quarter, the company reported $522 million in revenue and is forecasting $546 million to $574 million in Q2. 

At the midpoint, that would be quarter-to-quarter growth of 7.3%.

As of March 31, Robinhood reported $81 billion in assets under custody. 

At 18 million accounts, that would be an average of $4,444 per account. But the company reports annual revenue per user of just $137. 

$137 in annual revenue on a $4,444 account is just 3% per year. 

Breaking down those assets under custody shows the second-biggest asset is crypto. 

As of March 31, users held $65 billion in equities and $11.6 billion in crypto. That means 14% of all customer assets are in crypto. 

Bloomstran’s issue with the massive crypto share is the risk. 

In the first quarter of 2021, Robinhood lost 5% of total account value to users transferring their funds out of the app. 

In 2020, the company only lost an average of 1.2% of total account value per quarter.

Remember the controversial trading halt on GameStop and AMC in January.

Ahead of the IPO, investors — purchasers of those convertible notes we talked about earlier — poured $5.6 billion into Robinhood. Bloomstran says that investment, “plus shares given to founders/insiders” will equal 93% of the company after the IPO. 

If the valuation comes out to $33.6 billion, their position would be $31.3 billion. That’s up a whopping 650% from $5.6 billion, over the last two years. 

Bloomstran says the founders of Robinhood, Vlad Tenev and Baiju Bhatt, “will own 135 million shares, 16% of those outstanding after the IPO with a value of $5.4 billion.”

Those two alone will have 65% of voting power. 

In addition, the CFO and Chief Legal Officer were given shares that would, at an IPO price of $40 per share, be valued at nearly $100 million.

The CFO has been with the company since 2018 while the CLO joined Robinhood in May 2020. 

Although Bloomstran says the $30 billion valuation is “insane” he says the company can justify it because it’s in the FinTech space.

Wondering who Bloomstran thinks should buy this IPO? Here’s your answer:

Speaking of regulatory attention, Robinhood is facing trouble in that space yet again. 

FINRA Targets Vlad

Less than a month after Robinhood paid a record-breaking fine to the Financial Industry Regulatory Authority (FINRA), they’re back in the crosshairs again. 

The targets this time are the company’s founders, who are not licensed with FINRA. 

In its S-1 filing, Robinhood said it received, on July 26, “a FINRA investigative request seeking documents and information related to its compliance with FINRA registration requirements for member personnel, including related to the FINRA non-registration status of Mr. Tenev and Mr. Bhatt.”

The company said it intends to cooperate with the investigation. 

FINRA requires both firms and individuals to register with the agency. 

Currently, Robinhood Financial, the broker-dealer, and Robinhood Securities, the clearing broker, are both registered.

But the authority also usually requires the CEO of a registered broker to be registered, unless they’re granted an exemption. 

But Robinhood seems to have gotten around this requirement through a technicality. 

FINRA does not require the CEO of a parent company that owns a broker-dealer to register. 

Tenev is the CEO of Robinhood Markets, the parent company which owns the broker-dealer Robinhood Financial. 

Robinhood Markets is not registered with FINRA. 

And regulators are also investigating Robinhood employees’ stock trades that happened during the GameStop saga earlier this year. 

The company’s filing says, “We have also received inquiries from the SEC’s Division of Examinations and FINRA related to employee trading in certain securities that were subject to the Early 2021 Trading Restrictions, including GameStop Corp. and AMC Entertainment Holdings, Inc., during the week of January 25, 2021.”

Robinhood said the probe is focused on whether any of those trades “may have occurred in advance” of those restrictions being announced to the public.

Featured image Editorial credit: mundissima /