When the Robinhood [HOOD] share price opened at $38 per share on its first day of trading on 29 July, the stock surprised investors and traders by ending the day down 8% at $34.82.
Shares in the stock market trading app steadily recovered throughout the rest of the month before exploding in early August to hit $70.39 at the close on 4 August, lifted by a retail investor rally and buying from Ark Invest founder Catherine Wood.
Volatility in the Robinhood share price continued, however, when reports of a 98 million share sale by early investors dampened the mood and sent its shares back to $50.97 at the close on 5 August.
Since debuting on the Nasdaq, the Robinhood share price has risen 34% to close 17 August at $46.67.
“The next generation of investors is younger and more diverse than ever before, and finance is now as culturally relevant as music and the arts” - chief executive Vladimir Tenev & chief creative officer Baiju Bhatt
The stock’s performance has been driven by its appeal among young first-time investors looking for a commission-free entry into the stock market. Its business has benefited from people having more free time during the coronavirus pandemic and trying to find new areas of interest, such as trading, as well as the increased use of digital investing.
“While we are only six years into our journey, we have already seen profound transformations in how people think about their money,” chief executive Vladimir Tenev and chief creative officer Baiju Bhatt said in Robinhood’s IPO filing. “The next generation of investors is younger and more diverse than ever before, and finance is now as culturally relevant as music and the arts.”
As the company prepares to report its second-quarter results on 18 August, what can investors and traders expect?
Robinhood share price faces looming regulation
Robinhood carries a high level of investment risk. It is a relatively newly established technology stock with a high valuation of $39bn, according to Yahoo Finance, as of 18 August.
The company’s headwinds include high regulatory risk, after the US Financial Industry Regulatory Authority recently fined Robinhood $70m for causing investors “widespread and significant harm”.
As reported by the Financial Times, “widespread technical problems on the platform during periods of high volatility cost some traders tens of thousands of dollars”. It also allowed customers to trade derivatives when it was not appropriate for them and “gave customers false or misleading information about how much cash was in their accounts and their ability to trade on margin”.
Valuation of Robinhood's fine
The company’s business model has also been criticised. It uses a “payment for order flow” rather than a commission system, which means that Robinhood earns fees for putting its customer’s trades through market makers.
The Securities and Exchange Commission is said to be reviewing its stock market trading rules, which could include payment for order flows. If there is a clampdown or ban, then this will hurt Robinhood.
Its model has also been slammed for gamifying investing – by using emojis to tempt people to make more trades, for example – and has been partly blamed for fuelling retail rallies and then restricting trades in so-called meme stocks such as GameStop [GME] and AMC [AMC] earlier this year.
Stock trading’s surging popularity
In the first quarter, Robinhood revealed it had 22 million funded accounts and $81bn in assets under control.
It posted $331m in payments for order flow, of which $133m were equity trades and $198m options trading. This compares with $221m in the fourth quarter of 2020.
“As of the end of March 2021, our customers had seen appreciation of their assets of approximately $25bn. While markets may go up and down and things may be different in the future, this tells us our products is profoundly benefiting everyday Americans at a time when they need it most,” the group states.
Valuation of Robinhood's assets under control
Analysts expect Robinhood to lose $0.15 per share in its upcoming second quarter. Revenue is expected to rocket 114% year-over-year to $521m. In the same period last year, Robinhood earned $0.07 per share.
The company expects second-quarter revenue to be between $546m and $574m and a net loss in the range of $487m to $537m.
“The company boasts huge sales growth in recent quarters, and the company's potential is encouraging amid the surging popularity of stock trading among young investors,” wrote Scott Lehtonen, a portfolio manager for Investor’s Business Daily. “Shares are far from their post-IPO highs, and there is no current buy point, so the stock isn't a buy right now. Wait for the stock to form its first base, which [could] offer an initial buy point.”