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Friday, July 30, 2021
Robinhood shares fall on their first day of trading
The public debut for any company is exciting. But in many ways the Robinhood IPO meant a little more, serving as a sort of natural endnote to the brief and chaotic meme market of 2021.
Retail participation in the market has increased dramatically over the last year. And no company has been more closely associated with this surge in new investor interest than Robinhood.
That's how you end up with charts like this in your S-1.
Robinhood's shares hitting the market without the kind of hyper-volatile trading that defined the winter and spring of 2021, however, perhaps signals that this frantic phase is winding down. At least to some extent.
But the company's model, at least as of today, does depend on how engaged its customers remain through the cycle's inevitable ups and downs. That Robinhood's revenue primarily comes from payment for its order flow is well known; Congress has even held hearings on the matter.
In the first quarter payment for order flow related to options, stocks, and cryptocurrencies rose 231%, 322%, and 1,967% from the prior year, respectively. The revenue growth in each of these categories outpaced the growth in accounts, meaning Robinhood saw activity within its ecosystem rise faster than the ecosystem overall.
And so the company's future success will depend in part on its current and future members remaining engaged in financial markets. But we can see Robinhood already bracing for this engagement to decline with time.
In its S-1, Robinhood stated under an outline of its growth strategies: "As our customers grow their wealth, we believe they will continue to expand their relationship with our platform, providing an increased opportunity to meet their growing financial needs."
That language suggests a future in which payment for order flow decreases in relative importance, and is a near certainty long term. So you entice users with a free stock, these folks get rich trading options, then you sell them tax advice. Or something like that.
An evolving business model and a new story to tell investors is, however, just part of life as a public company CEO. Vlad Tenev and the team at Robinhood will, at some point in the future, face the frustration of a public market that doesn't reward record revenues and profits. Perhaps that is the feeling after Thursday's debut.
We began this piece noting that Robinhood shares fell on the company's first day of trading. Which is true. And today, technically, does begin day two. But to borrow a phrase from former Amazon (AMZN) CEO Jeff Bezos, in financial markets it is always day one. And the opening bell rings at 9:30.
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