Robinhood's Meme Stock Status Fuels IPO Uncertainty

Sunny Samanta

26th Aug'21

 

Earlier in January 2021, when the GameStop stocks soared like a rocket strapped to its back, Robinhood Markets Inc became a huge beneficiary. It all happened due to the "n" numbers of memes that floated everywhere on the internet, such as the GameStop Corp with retail investors. The trading volatility caused by becoming a meme had stalled Robinhood's initial public offering (IPO) as some potential investors paused from investing in it.

The short squeeze that took place with the failing GameStop stocks (due to the pandemic) caused giant monthly active users to surge on the Robinhood trading app. What stood at 11.7 million active users in December 2020 jumped up to 21.3 million in June. It mainly happened with rising stock speculations by the retail investors surrounding GameStop and AMC Entertainment Holdings Inc. 

 

Robinhood's Warning

With everything going down on Wall Street, Robinhood had issued a warning while making an unusual move. It reversed around 20% to 35% of its IPO shares only for the retail investors using its app. And while it expected to raise about $2 billion for its IPO, Robinhood had mentioned that the participation of retail investors seeking long-term gain could lead to a scary roller coaster ride. As a result, social media reviews showed many unfavorable opinions of some retail investors on sites like Reddit. Even interviews with Robinhood made the IPO's prospect of Robinhood look more skeptical as if it was bidding one of the IPOs with highest listing gain.

 

Robinhood

 

Assessment of Robinhood's IPO Pursuit Valuation

Robinhood had been seeking a valuation of $35 billion for its IPO. This pursuit of Robinhood triggered a chain of other unfavorable reviews. Also, the risk of regulators flared up by the meme stocks imposed the risk of regulators cracking down on its business, fueling its IPO uncertainty. A popular review that floated around in its misfortune time was –

"I had enjoyed Robinhood a lot, it sparked my interest in investing, it's easy to use and straightforward. I just don't trust them to do what's right for their customers the next time they find themselves in a hard spot."

The review came from Zachary Wells, a Kansas City, Missouri, customer in the Robinhood app. Following such scathing reviews, even a spokesperson declined to make a statement when approached for one.

 

Robinhood IPO Listing

 

Why is Robinhood's IPO Pursuit Criticized?

Despite the benefits obtained from the GameStop stock frenzy, Robinhood's unfavorable measures towards listing its IPO were criticized for various reasons.

 

  • The trading app placed temporary restrictions on buying GameStop and other stocks at the peak of the event that led to hedge funds losing a lot of money due to the short squeezing. Robinhood had stated that it took such measures to keep the financial and operational stability of its platform. The reasoning stuck out with the masses and independent investors, including many from Reddit who called for the Boycott of Robinhood's IPO.
  • Robinhood brokerage relied upon "payment for order flow" for its revenue. It received enormous criticism as it meant the trading app could collect fees from market makers for routing trades to them while not charging its users for individual transactions. Robinhood stated that it made the trade routing cheaper for its users and that only the charging commission could be more expensive. The decision caused a massive conflict of interest where it favored brokers to send orders only to users with higher fees.

 

Conclusion

While the practice of excluding retail investors benefits the IPO listing, Robinhood’s decisions made it more evident that investors investing in it would not see any significant gains. It was a sign of potential trading volatility as one of its users commented that she would skip Robinhood's IPO offering and preferably wait for its first quarterly earnings before deciding on buying the stock. The steps taken by Robinhood may even explain IPO rush in 2021.

Another Robinhood app user named Benhamish Allen, who had earlier plans to invest in its IPO, skipped the IPO too. He said, "It seems silly I should be able to borrow money from a company and then buy that company back with the money I borrowed."

 

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A lone wolf by definition, a writer by heart, and a lost star with ambitions to light up the dark both inside and around me, sometimes by immersing myself into books or video games or traveling with a backpack to an uncertain destination believing that life is all about the choices we make and we don't.

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