By Sergei Klebnikov, Eliza Haverstock and Antoine Gara
Robinhood, the mobile app that pioneered commission-free stock trades, filed for its hotly anticipated initial public offering on Thursday afternoon, divulging $959 million in revenue for 2020 as retail trading boomed—up 245% from 2019.
The S-1 filing also disclosed an incentive-laden restricted stock award plan that could earn cofounders Vlad Tenev, 34, and Baiju Bhatt, 36, billions of dollars in coming years. In late May, Robinhood’s board approved awards of 22,200,000 and 13,320,000 restricted stock awards to Tenev and Bhatt, respectively, which will vest over eight years after its IPO depending on how the company’s stock performs.
If Tenev and Bhatt achieve each of the price-based stock milestones, which range from Robinhood reaching $120 a share to $300 a share, the total award could be worth over $7.5 billion. Tenev stands to make about $4.7 billion, while Bhatt stands to make over $2.8 billion.
Tenev and Bhatt, who met as undergraduates at Stanford University in 2005, are already billionaires. They first appeared on the Forbes billionaires list last year, when the app was valued at more than $11 billion in an August 2020 funding round. (Each cofounder owns an estimated 10% stake in the company, giving them a net worth of $1 billion, respectively, according to Forbes’ estimates. Robinhood’s S-1 filing did not disclose details on its ownership structure.)
Another nugget Robinhood’s IPO filing is the disclosure of a sweeping investigation into trading restrictions it put in place amid a surge in meme stock trading in early 2021.
According to its S-1, CEO Tenev and others at the company have received requests for information and subpoenas related to trading restrictions it put on stocks like video game retailer GameStop and movie theater chain AMC Entertainment. Those inquiries came from the United States Attorney’s Office for the Northern District of California, the U.S. Department of Justice, the SEC, FINRA, the New York Attorney General’s Office and other state attorneys general offices. Robinhood said in its prospectus, “a related search warrant was executed by the USAO to obtain Mr. Tenev’s cell phone.”
The investigations highlight how Robinhood’s IPO and surging valuation comes at a time of both rapid growth and deep problems for the company.
Since the onset of the Coronavirus pandemic, Robinhood’s business has grown almost exponentially, bringing its active users to a staggering 18 million as hidebound millennials took to the app to trade stocks and options for free during quarantine. Robinhood’s valuation has ballooned in lockstep with the trading surge via several funding rounds, with the company raising a total of $5.6 billion year-to-date, according to Crunchbase. Secondary share offerings in February, ahead of its IPO, have now given the company a valuation of as much as $40 billion.
The app is at the center of an unprecedented rise in retail trading, particularly options trades. Revenues rose about eightfold from just $77 million in the fourth quarter of 2020, to $552 million in the first quarter of 2021. The app-based brokerage’s total users now compare to established players like E-Trade and Charles Schwab.
Most of Robinhood’s revenue comes from trading in speculative markets. It made $285 million in revenues from option and cryptocurrency trading in the first quarter, two-thirds of its overall trading revenue. Furthermore, trading in Dogecoin, a cryptocurrency created as a joke, accounted for 34% of Robinhood’s cryptocurrency trading. Other business lines are growing fast. Securities lending, the lending of customers’ shares to short-sellers for a fee, generated $35 million in revenue in the first quarter, an increase of 448%. Interest earned on margined assets rose 254% to $27 million.
Due to its breakneck growth, particularly in the riskiest parts of the market, Robinhood has been besieged by technical problems and regulatory investigations into the suitability of its offerings.
A day before its IPO filing was approved, the company was hit with a nearly $70 million fine with regulatory body FINRA, which revealed how the company had lost users’ money due to chronic outages during trading days and incorrectly sending margin calls on millions of options trades. “Despite Robinhood’s self-described mission to ‘de-mystify finance for all,’ during certain periods since September 2016, the firm has negligently communicated false and misleading information to its customers,” wrote regulators in a press release. Announced yesterday, the fine represents the largest ever ordered by FINRA.
In June 2020, Forbes first reported that a 20-year-old Robinhood customer died by suicide after seeing a negative $730,000 balance on his account due to options trading. Two days later, Robinhood’s founders released a statement pledging to tighten eligibility criteria, educational resources and upgrades to its user interface for customers trading options. The family of the customer, Alex Kearns, sued Robinhood in February in a wrongful death suit.
There is also scrutiny into how Robinhood makes its money. Last August, a Forbes investigation spelled out how Robinhood generated the bulk of its trading revenue off of extraordinary speculative options trades. A large chunk of Robinhood’s business is built on selling its customers’ orders to trading titans like Citadel Securities. So-called PFOF or “payment for order flow” made up most of the company’s revenue in the quarter a year ago, Forbes found, with options trades being the most lucrative.
According to its S-1, over 80% of its transaction revenues came from a handful of algorithmic trading firms Citadel Securities, Susquehanna International Group, Jump Trading, Wolverine Holdings and others. Citadel Securities, owned by billionaire Ken Griffin (net worth: $16.1 billion), is Robinhood’s largest customer, accounting for 27% of overall transaction revenues.
In mid-December, the Securities and Exchange Commission fined Robinhood $65 million for failing to disclose, until late 2018, its business deals with these trading firms. Robinhood neither admitted nor denied the SEC charges. Litigation is an ongoing story for Robinhood as it goes public. Its S-1 lists a total of 49 plaintiff lawsuits and regulatory inquiries into options trading, account takeovers, trading outages, and its meme trading restrictions.
To address its widespread issues, Robinhood has invested heavily in much needed compliance and customer service infrastructure. However, that operational expense has come at a cost. In 2020, operating expenses ballooned 246% to $945 million and in the most recent quarter alone, such expenses reached $463 million.
Robinhood’s prospectus raises the risk that its user base may have already peaked. The latest numbers for both monthly and daily active users are down from their peaks of around 20 million and 10 million, respectively. Now monthly users stand at 18 million and daily users are at 8 million, as of March 31, its filing states.
Customers can also pull their money and trade elsewhere. Some 206,000 Robinhood customers pulled a collective $4.1 billion from the brokerage in the first quarter of 2021, representing 5% of overall assets under custody. The dollar value was ten times the amount of average quarterly cash redemptions by customers in 2020 and four times the average assets under custody that was withdrawn.
Today, it competes with the mainstay discount brokerages including Fidelity, E-Trade, TD Ameritrade and Charles Schwab—all of which cut their trading commission fees to zero. Robinhood’s startup rivals include Webull and Acorns, which announced a $2.2 billion SPAC deal in late May.
Though Robinhood’s upcoming IPO might garner the most eyeballs, fintech startups of all kinds are clamoring for a taste of the public markets this year. Two examples: debit-card issuer Marqeta completed an IPO in mid-June that made the founder a billionaire, and Flywire, a company that helps organizations accept foreign-currency payments, IPOed at a $3.5 billion valuation in May. The first three months of 2021 set a quarterly record for fintech exits, according to CB Insights.
There’s more riches to be had—especially for Robinhood’s founding pair. Launched in 2013 with a mission to “democratize finance for all,” Robinhood’s cofounders stand to make billions from their app as it goes public.
If Robinhood itself becomes the next great meme stock to trade, it may bring customers along for the ride. Robinhood said in its prospectus it will set aside up to 35% of its IPO for customers to buy on the brokerage.