- 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.
For those that haven’t read Robinhood’s 360-page S-1 and subsequent registration amendment, some brief observations follow on some of the most egregious aspects of one of the most one-sided, enrich the insider casino offerings I’ve ever seen, and there have been some doozies. 1/— Christopher Bloomstran (@ChrisBloomstran) July 27, 2021
Bloomstran made a comparison to the app’s namesake, Robin Hood.
If Robin Hood robbed the rich to give to the poor, the modern-day version is now in the business of gutting the sheep and pocketing the wealth of the retail speculator for himself. Fleecing at least. “Robinhood is democratizing finance for all,” reads the prospectus. Sure. 2/— Christopher Bloomstran (@ChrisBloomstran) July 27, 2021
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.
Including proceeds from the IPO, the VAST MAJORITY of capital will have been raised just in the past two years, mostly 2021. Reread the breakdown of how much capital the IPO buyers are investing and what percent of the company they will own. This makes SPACs look non-dilutive. 5/— Christopher Bloomstran (@ChrisBloomstran) July 27, 2021
From its founding in '13, $HOOD raised $5.6B in a series of $2.2B convertible preferreds and 2 tranches of $4.7B in converts (the converts sold just this year). Additional paid in capital totals $149m. The balance sheet has $4.8B cash with shareholder equity a negative $1.5B. 6/— Christopher Bloomstran (@ChrisBloomstran) July 27, 2021
Most of the negative equity value reflects “losses” on the degree to which converts issued in February are already “in the money.” They were money good at issue! More on this in a bit. The IPO will sell 55 million shares, with the founders & CFO selling 2.6 million of those. 7/— Christopher Bloomstran (@ChrisBloomstran) July 27, 2021
An over-allotment option for another 5.5m could bring the total to 60.5m shares sold at an expected range of $38-$42 per share. Using the midpoint, the company may raise $2.3B, bringing cumulative capital raised to $7.9B. At $40, Robinhood will have a market value of ~$33.6B. 8/— Christopher Bloomstran (@ChrisBloomstran) July 27, 2021
Remember, this is against $7.9B in cumulative capital raised, including proceeds from the IPO. In their generous hearts of hearts, 25% to 30% of the shares offered in the IPO are "reserved" for Robinhood “customers.” That’s 13 to 16 million shares at a midrange $40 per share. 9/— Christopher Bloomstran (@ChrisBloomstran) July 27, 2021
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.
There are 35,520,000 2021-class “market based” RSU shares outstanding that vest at the IPO. These will have $1.42B of value at a $40 IPO price. Not bad for a few months of ownership. These were granted in MAY – TWO MONTHS AGO. Brilliant timing. What luck. 17/— Christopher Bloomstran (@ChrisBloomstran) July 27, 2021
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.
There are 27.8m shares set aside for future SBC. This is a $1.1B set-aside for insiders. In total, an additional 14% dilution is authorized.— Christopher Bloomstran (@ChrisBloomstran) July 27, 2021
There are additional shares set-aside for an Employee Stock Purchase Plan, offering new shares at a discount to market value. Why not. 18/
Next on his list of problems with the Robinhood IPO, is the massive valuation of the company.
Cash in the firm will total about $7 billion with the addition of proceeds from the IPO. So how do you get to a ~$34B valuation?— Christopher Bloomstran (@ChrisBloomstran) July 27, 2021
On fundamentals, 2020 REVENUES totaled $959m. 3/31 quarterly revs were $522m & 6/30 are estimated by the company at a range of $546 and $574m. 21/
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.
14% of customer assets are crypto! You don’t see any bonds. You don’t see any mutual funds. Half of transaction revenue, which are 81% of firm revenues, come from OPTION rebates, while options at market value account for only $2B of customer assets. Tell me its not a casino. 25/— Christopher Bloomstran (@ChrisBloomstran) July 27, 2021
Bloomstran’s issue with the massive crypto share is the risk.
The company naturally collects transaction fees from its trading partners and "can not guarantee the risk of a hack or theft." Most crypto is stored in “cold pockets” but, of course, no SIPC protection exists on crypto. I can't imagine anything untoward or going wrong here. 27/— Christopher Bloomstran (@ChrisBloomstran) July 27, 2021
17% of firm revenues were earned in Q1 from crypto transaction “rebates,” up from 4% in the prior quarter. Wile $HOOD supports 7 cryptos for trading, no less than 34% of crypto revenues were from DOGECOIN! Hilarious reading this. I'm probably wrong about this being a casino. 28/— Christopher Bloomstran (@ChrisBloomstran) July 27, 2021
In the first quarter alone, “customers” traded $88B of crypto against $11.6B held at 3/31 and $3.5B at year-end 2020. Definitely not a casino, but a platform encouraging the long-term ownership of investments. You think new "customers" learn all about the coffee can approach? 29/— Christopher Bloomstran (@ChrisBloomstran) July 27, 2021
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.
The valuation seems insane, but will be “justified” because the company is a FinTech player. By comparison, Schwab’s market cap is $128 billion on $58 billion of book value and $5 billion of profit. Profit at Schwab is more than twice Robinhood’s total revenues. 36/— Christopher Bloomstran (@ChrisBloomstran) July 27, 2021
Schwab’s assets under custody (larger retail & institutional clients) total $7.5 trillion on only 31.5 million active customer accounts. Fewer than 2x the accounts but nearly 100x the assets under custody with a valuation only 3x as great as the expected valuation of $HOOD. 37/— Christopher Bloomstran (@ChrisBloomstran) July 27, 2021
Wondering who Bloomstran thinks should buy this IPO? Here’s your answer:
Rob the unsuspecting and keep the gold, or the crypto, is sadly the new Robin Hood. In a week where @GaryGensler famously introduced himself to Twitter, perhaps he has room on his plate for this one. The IPO is what it is. The way the company makes money, on the other hand…42/— Christopher Bloomstran (@ChrisBloomstran) July 27, 2021
On the IPO, its all there in black & white in the S-1. None of it is illegal. Moral? Surely contemptable. If you like investing in IPOs, where sellers are selling for a reason, and if you like being diluted by people who are in the business of taking, get your subscription in. pic.twitter.com/soLkhcF3Ww— Christopher Bloomstran (@ChrisBloomstran) July 27, 2021
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.
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