Robinhood (HOOD) is an American financial services company headquartered in Menlo Park, California, known for offering commission-free trades of stocks, exchange-traded, and cryptocurrencies via a mobile app introduced in March 2015.
After perusing their S-1, I can’t help but offer the same recommendation I gave readers for the Coinbase (COIN) listing, which proved to be spot on.
Although this is a real company with real revenues, the growth rates are particularly high because of a one-off phenomenon in alternative asset classes.
I would urge readers to not buy shares of HOOD directly after they are public but instead wait for an entry point sometime after the lock-up period expiration which usually coincides with the insiders and long-time employees unloading shares or a partial trove of them.
The same happened to Palantir (PLTR) which saw a meaningful sell-off upon the lock-up expiration and although PLTR shares are higher today than they were the day of lock-up expiration, it’s better to avoid that dip if you can. PLTR had a big dip when the lock-up expired presenting a great entry point into shares.
Lock-up periods are usually 180 days and I firmly believe this company that will be trading under the ticker symbol HOOD, is not worth paying a premium before that 180-day lock-up period is over.
Don’t be that sucker.
To dovetail with my thesis of not buying HOOD too early is the analysis of their inherent high stakes/ high rewards nature of the business.
Let’s not fudge the details, this is a high-risk business and as of now, they have been handsomely rewarded for it, but that might not always be the case.
They pioneered commission-free trading when the likes of Fidelity and Charles Schwab were still charging $15 to execute one side of a trade.
Why can they offer free trading?
Order history is paid for by third-party high-frequency traders, namely Citadel.
Citadel accounts for 27% of payments for Robinhood retail order flow, and Payment for order flow is 81% of total Robinhood revenue.
The thinking behind buying order flow is to then apply the data through machine learning to even front-run orders of normal retail traders and profit off the spread or micromovements in shares.
They even make markets with their liquidity and trade their own proprietary books.
And yes, this is legal in the United States and companies have gone gangbusters in high-frequency trading (HFT) like Virtu Financial founded by Vincent Viola who owns the NHL franchise Florida Panthers and is big into competing for his horses at the Kentucky Derby.
It obviously pays to do HFT, and if done properly, are great businesses and these are the companies propping up HOOD today.
Robinhood has taken advantage of the Millennial lust to go crypto or go home.
The numbers back me up — $11.6 billion of crypto under custody by the end of Q1.
Bitcoin was the HOOD’s most traded asset in 2020 and the first quarter of 2021 and 17% of total revenue came from crypto in Q1, (compared to 4% in Q420)
In the S-1, it said that HOOD’s business “may be adversely affected, and growth in our net revenue earned from cryptocurrency transactions may slow or decline, if the markets for Dogecoin deteriorate or if the price of Dogecoin declines.”
HOOD and its future success are now uniquely levered towards alternative coin Dogecoin which is now 34% of their total crypto revenue in Q1.
This is the altcoin that Elon Musk joked about, and it explains the 54% growth of 2020 revenue in the first 3 months of 2021.
This is an incredibly high-risk growth strategy that won’t work out every quarter.
HOOD now has 18 million cumulative funded accounts showing the popularity of the business and did $522M in 1Q21 revenue vs. $127.6M in 1Q20 and did $958.8M in revenue in '20 reporting $7.5M in net income.
The median age of customers on HOOD’s platform is 31 and over 50% are first-time investors so if they nurture this customer base, this could be a sticky business moving forward.
If they lead them down this treacherous Dogecoin cliff, it could be trouble and result in terrible quarterly earnings.
A few other risks I felt notable was that Robinhood users went from holding/trading $400M of crypto to $11.5B of crypto from March 2020 to 2021, but HOOD intends to potentially never offer delivery of customer crypto purchases.
This means they are exposed to derivative contracts which just layers on high risk on top of high risk.
Robinhood said there is tremendous regulatory risk for its stock with the company fined $70 million by the securities industry's self-regulator, FINRA, for misleading customers and system outages that the agency said hurt Robinhood's customers.
They said they will likely incur similar fines in the future and investors will need to stomach its predisposition to skirt the law.
There is nothing low-risk about HOOD, and I would wait for a big sell-off after the lock-up expiration to get in at a certain discounted price. Readers shouldn’t blindly pay a premium for HOOD, the risk isn’t worth it.
