Nonetheless, Robinhood’s efforts may eventually expose the company’s newly public stock to the mob mentality associated with the Reddit crowd, at least in the early stages.
“There is no denying that retail traders are far more volatile. The more [Robinhood] sells to retail, the more vulnerable they will be to some sort of Reddit super squeeze type of activity,” Rainmaker Securities managing director and co-owner Greg Martin said.
“Given that Robinhood’s clients and the Reddit crowd have been responsible for some sharp moves in various stocks – AMC, GameStop – sharp moves that are unrelated to fundamentals, having more people like that as shareholders potentially exposes Robinhood’s stock to great volatility,” said IPO expert and finance professor Jay Ritter of the University of Florida.
Assets under custody have risen to around $80 billion, up from $19.2 billion in March of last year. The number of monthly active users is estimated to be around 17.7 million.
“I recognize that the more allocations to IPOs you give to retail investors, the more volatility in your stock, and of course, it can end up hurting those same retail investors,” Martin added. Rainmaker Securities lends money to people who want to buy stock in private companies like Robinhood.
According to Rainmaker, secondary market bids for Robinhood have remained in the $55 per share range since the GameStop trading frenzy in January. However, the volume of bids has increased, signaling “comfort” from investors, according to Martin.
“I believe Robinhood is a real company with significant room for growth,” Martin, the founder of Liquid Stock, added. “They are the market leader. I think it would be a little frightening to be out there in a big short.”
Robinhood, the next viral stock?
Robinhood’s public debut has already sparked a flurry of activity in chat rooms such as Reddit’s WallStreetBets.
A post about “shorting the Robinhood IPO” has received over 11,000 comments, while other posts threaten to “ignore the IPO entirely.”
When Robinhood limited trading of certain securities during the GameStop trading mania amid increased capital requirements from clearinghouses, it appears to have turned off some customers.
“Ignore Robin Hood entirely. Let them suffer the consequences of lawsuits and a loss of customer base,” one WallStreetBets post said.
“It would be interesting to see the Reddit sphere try to hurt Robinhood, who is really just trying to help smaller investors get access to IPOs,” Martin added, assuming underwriters will price in that risk and provide downside protection.
“I believe [Robinhood] will be one of the greatest meme stocks of the future because, according to the filing, they have no equity. They have a negative equity position. They have roughly zero earnings and are growing very quickly, so it’s the kind of thing that the market seems to like lately,” Peterffy said earlier this month.
In general, Peterffy praised Robinhood and the fact that it is bringing young people into the markets.
Robinhood is on brand.
According to Matt Kennedy, senior strategist at Renaissance Capital, which advises clients on IPOs and manages the Renaissance Capital IPO ETF, he has never seen a company offer this many shares to the retail market.
“Historically, companies going public prefer large, sophisticated institutional investors,” Kennedy explained. “I think it makes sense for Robinhood, both in terms of their democratization of investing and finance and as a marketing event for the company.”
Brokerages have historically avoided the IPO space due to the downside risk of public debuts, he added.
“Selling to retail carries a high risk of upsetting a lot of people, which the company, underwriters, and especially regulators typically do not want to see,” Kennedy explained.
According to Tim Welsh, founder and CEO of wealth management consulting firm Nexus Strategy, allocating IPO shares to retail investors will not change the company’s trajectory.
“I don’t believe this makes [Robinhood] more or less vulnerable to Reddit traders. When they set their minds to it, these people will pay whatever price they want for a stock, regardless of its fundamental value,” Welsh explained. “Whether they buy Robinhood at the IPO price or wherever it ends up trading, if it is in their sights, they will bid it up,” he added, assuming Robinhood becomes the next meme stock of the day.
According to Rich Repetto, retail investing analyst at Piper Sandler, investors and short sellers are “very wary of shorting anything that may have a significant retail component.”
Meanwhile, according to Ritter data, the average first-day return for IPOs last year was 41.6 percent.
“A lot of it was because retail investors wanted to buy shares in a lot of these hot IPOs — Doordash, Airbnb, Snowflake — all of these guys who had big pops on the first day,” Martin explained.
“The big underwriters were talking to the big institutions, but never to the people on the Robinhood platform. “The market has realized, and I believe companies have realized, that ‘I want to be talking to the people who are going to buy my shares on the open market,’” he added.
According to Welsh, Robinhood, which plans to trade on the Nasdaq under the symbol “HOOD,” is ultimately making a good move by including individual investors in its public debut.
“I actually think that holding IPO shares aside for your customers is a very clever strategy – if you own a company’s stock, you are more likely to be loyal to that brand and continue to shop there due to that feeling of ownership, no matter how small,” Welsh added.