When financial historians look back at this time period, they will certainly note the impact of Robinhood. The startup brokerage emerged onto the scene in 2013 and immediately drew attention with its revolutionary promise of commission-free trading.
In a way, it was similar to the previous generation of new brokerages like E-trade (NYSE: MS) and TD Ameritrade (NYSE: SCHW) by increasing access to trading and financial markets via low-commission trading and electronic trading. However, it was a shock to the brokerage industry as it forced nearly everyone to significantly reduce commissions.
And, it's influence has only magnified as trading has become more popular due to stimulus checks, lockdowns, and a decade-long bull market. So, it's not entirely surprising that the company is looking to go public later this month.
IPO Details
It's interesting that the company is pushing ahead with its IPO given the flack it took during the Gamestop (NYSE: GME) euphoria when the brokerage limited trading in certain issues. The company was hauled before Congress and lambasted by legislators on both sides. It also took some shrapnel online due to traders frustrated by these limits.
It's also taken criticism of its business model in which it sells "order flow" to institutions that can use this data to increase the profitability of their trades. Robinhood responds that its free trading is creating more value for users and that it had to shut down trading due to its clearinghouse. It also believes that as a public company, it would have greater access to liquidity which would prevent such occurrences.
So far, the experience only increased the popularity of the app as it shot higher on the app store. In total, it reported 13 million users in May of 2020 but many expect this could have hit 25 million by now. In contrast, Schwab has 25 million users.
Stock Price Outlook
For many companies, going public is a negative for the underlying business as it dilutes ownership and distracts focus. Employees getting rich can also reduce motivation to maintain growth and ward off competitors. However, for Robinhood, going public is going to benefit their business as it will give them more liquidity.
The main risk to their business is that they would have to shut down trading during volatile market conditions. This risk would go down if it's a public company which makes the business better and more attractive to investors.
Some other reasons to be bullish on its prospects are that it's on pace to become the world's largest brokerage. The bigger it gets the more it will benefit from network effects. It has the ability to monetize further by offering higher-margin products and services.