Robinhood IPO filing reveals $1.4 billion loss
Robinhood, the trading app that's empowered a new generation of investors, revealed in its IPO filing that it lost $1.4 billion in the first three months of the year. The company also said its revenue soared 309% during the same period as investors flocked to its service.
Robinhood filed its prospectus with the U.S. Securities and Exchange Commission on Thursday as it prepares to sell stock to the public for the first time, where it will trade under the symbol HOOD. The IPO will give investors a chance to own part of a fast-growing company that has rocked the traditionally staid brokerage business — and drawn criticism from lawmakers and consumer advocates.
Since its launch in 2014, Robinhood's popularity has forced rivals to get rid of commissions and to offer apps that make trading easy and maybe even fun. But as it's drawn in 18 million funded accounts, with more than half its customers first-time investors, the company has also agreed to pay more than $130 million in recent years to settle accusations by regulators, with the most recent fine announced just a day earlier.
On Thursday, Robinhood said its plans go far beyond stock trading.
"As we look to the future, we want to help Robinhood customers manage all aspects of their financial lives in one place," the company said in the filing. "We envision them moving seamlessly between investing, saving and spending all on the Robinhood platform."
Despite its losses and controversy, Robinhood offers something that's always in great demand on Wall Street: explosive growth.
Robinhood's revenue rocketed to $522.2 million in the first three months of the year, up from $127.6 million a year earlier. It lost $1.4 billion during the quarter, but that was almost entirely to account for a $1.5 billion change in the value of liabilities it has related to debt and warrants that it issued in February. It's coming off a profitable year, where it earned $7.4 million after losing $106.6 million in 2019 and $57.5 million in 2018.
Robinhood had 17.7 million monthly active users in the first three months of 2021, more than doubling in a year.
They're holding stocks and options and — increasingly — cryptocurrencies. Crypto accounted for 14% of all of Robinhood's assets under custody in the first three months of 2021. That's up from just under 3% at the end of 2019.
And Robinhood wants to reserve some of the stock in its IPO just for its customers. It expects 20% to 35% of its Class A stock to go directly to customers. The Class A shares being offered in the IPO will have one vote apiece. Robinhood also has Class B shares, which have 10 votes apiece, and are controlled by the company's founders, Baiju Bhatt and Vladimir Tenev.
Risky business?
But some critics claim that the app encourages risky behavior among beginner investors, even improperly allowing some users to make riskier trades than they were perhaps ready for. Robinhood has also been criticized for failing to make clear to customers that it makes most of its money by routing their trades to Wall Street firms taking the other side; and its supervision of its technology was weak and helped lead to outages of its service.
And the regulatory scrutiny isn't finished. The California attorney general's office in April issued an investigative subpoena to Robinhood's crypto trading subsidiary, asking about its trading platform and other matters. Massachusetts, meanwhile, is trying to bar the trading app from its state following accusations that it makes investing into too much of a game for investors.
The head of the SEC has also criticized the "gamification" of investing seen across mobile brokerage apps, which encourage people to trade more often. While that can mean more revenue for Robinhood and other brokerages, some studies suggest that it can lead to lower returns for the average trader.
"Payment for order flow"
Robinhood makes much of its revenue by routing its customers' orders to big Wall Street firms, rather than the New York Stock Exchange or Nasdaq. It's something called "payment for order flow," and other brokerages do it as well.
When Robinhood customers say they want to buy 100 shares of GameStop or Tesla, for example, it often sends the order to a trading firm like Citadel Securities, which will sell the shares. The trading firm pays Robinhood for the flow of orders.
A handful of such trading firms accounted for 38% of all the trading volume in January. And just like in other areas of the economy, a few huge players are gaining an advantage by controlling huge amounts of data, whether it be search engines, e-commerce or transaction flows, SEC Chair Gary Gensler said in a speech last month.
Last year, Robinhood paid a $65 million fine to settle accusations by the SEC that it made misleading comments to customers between 2015 and late 2018 about its main way of making money. The SEC also said Robinhood customers were getting their trades executed at worse prices than they would have gotten at other brokers, which in some cases more than offset the savings they had from paying zero commissions.
The company has made moves recently to assuage some of the concerns. In its settlement with the SEC, for example, Robinhood agreed to hire a consultant to review its policies to make sure its communications comply with federal law, for example.
Among the risk factors listed by Robinhood are regulatory concerns, with the company noting that it expects more regulatory scrutiny to continue. "We have been subject to regulatory investigations, actions and settlements and we expect to continue to be subject to such proceedings in the future," it noted in the filing.