With Robinhood IPO having just opened for trading and lower than expected, below are comments from Publicis Sapient, Executive Vice President, Financial Services, David Donovan.
Q2 2021 hedge fund letters, conferences and more
Robinhood's Risky Business Model
“I have a Robinhood account, but I would be both cautious and hesitant on Robinhood’s IPO as an investor. Robinhood is operating on a risky business model underpinned by pay-for-order-flow which is banned in other key markets such as Canada, UK, and more. The lion's share of Robinhood’s revenue is driven by pay-for-order-flow, as high as 81% in recent reports, which means the overwhelming majority of Robinhood’s revenue stream could be placed under review at any moment. The recent news that Robinhood have been handed the largest ever FINRA fine - $70million, for weak policies, platform outages, and not performing proper due diligence of risky options trading accounts for consumers who don’t understand the risk of option trading, compounds my cautious stance on its IPO.
Robinhood has seen enormous customer and revenue growth due to the recent market uprise of meme stocks and crypto, which are both volatile markets. When investing, I’m looking for predictability, not unpredictability, especially when considering revenue stream risks. To Robinhood’s credit, their strategy centered on revolutionizing retirement through offering U.S. retirement accounts serves to help diversify their revenue streams from their current business model. Retirement accounts are fee-based which would provide a less volatile recurring revenue compared to equity and crypto trading. Of course, Robinhood would still have to fight the brand perception of doing what is best for the customer.
Pricing for Robinhood’s IPO is set between $38-$42 Billion, with a goal of hitting $35 Billion market cap which is very expensive in general for any stock, but even pricier when considering all the factors contributing to its volatility; frankly, that’s a pretty penny for uncertainty.”
About Publicis Sapient
Publicis Sapient, the Digital Business Transformation hub of Publicis Groupe, is purpose-built to help clients reimagine their business for the digital age, helping ensure what they do has a material impact on their business performance and the experience of their customers. We bring a startup mindset, fully integrated teams, and agile methods to established companies to unlock value in ways that delight their customers and improve their operational effectiveness. Our approach to transformation is grounded in a view of both the company and the customers simultaneously, and a unique fusing of strategy and consulting, experience, and engineering with an enduring culture of problem-solving creativity. We are proud to say that this culture is embedded among every one of our 20,000 employees and leaders alike, who believe that our role is to help our clients navigate the space between now and next. I.e. the HOW of Digital Business Transformation.
