Robinhood IPO: Stocks Drop 8.4%

SAN FRANCISCO Robinhood helped fuel a meme stock frenzy this year that sent small business stock prices on a roller coaster ride. On Thursday, its IPO was much more moderate.

Shares in the stock-trading start-up opened trading at $38, the same price as the offering, but then fell a whopping 11 percent. They closed the day 8.4 percent at $34.82, valued the company at $29 billion and showed investors were skeptical of Robinhood’s grand mission to topple Wall Street.

Robinhoods’ free stock trading service has helped create the conditions for wild trading moves in meme stocks, powered by investors who hype their trades on social media. The company’s offering is one of the largest in a crazy year for public market debuts, though few others have had the profile and level of controversy, including service interruptions, fines, congressional hearings, protests, and memes like Robinhood.

But the lukewarm trading debut suggested there may be limits to investor euphoria for IPOs, even in a blockbuster year ahead of them. In the first six months of the year, there were 213, more than in any full year in the past decade, according to Renaissance Capital, which tracks IPOs. This week alone, 25 companies in the United States would go public, making it the busiest in two decades. Instacart, the grocery delivery company, and Nextdoor, the social network, are expected to go public this year.

A first day slump like Robinhoods is rare. Shares in IPOs in the United States rose an average of 39 percent on their first day of trading this year, according to Dealogic, a data provider. But since then, they have fallen an average of 1.6 percent, according to Renaissance Capital.

The unpredictability of Robinhoods’ first trade was compounded by an unusual move by the company’s mission to democratize finance. Robinhood decided to sell as much as a third of its offerings to retailers through its own app. Most other companies that have gone public have not done so or have only offered a small number of shares to private investors.

That supply could have suppressed early trading, as first-day price gains are often driven by demand from retail investors who were excluded from the IPO. Only about 20 percent of the offerings were sold to retail customers, a person with knowledge of the offerings said, indicating less interest than expected.

Robinhoods CEO and co-founder Vlad Tenev said in an interview that the IPO was a celebration of the individual investor in America. He added: We were just aware that this is also an important moment for our customers.

Robinhood’s lukewarm public debut raises questions for the Silicon Valley company after an eventful year.

Early in the pandemic, when the stock market crashed, Robinhood had to deal with outages at crucial moments. As the year progressed and the app became more popular, commentators questioned the level of risk traders took, especially on highly leveraged trades.

Other aspects of the Robinhoods app, including confetti explosions and lottery scratches, have drawn comparisons to gambling. A young customer, Alex Kearns, committed suicide last year after a misunderstanding about debts on his account. Robinhood has since settled in with his family.

In January, stock traders gathered on social media to boost the share price of meme stocks, including GameStop, the gaming retailer, and AMC Entertainment, the movie theater chain.

Robinhood had to shut down a number of transactions and raise emergency funding to cover the collateral needed for its clients’ transactions. Mr Tenev’s mobile phone was seized by authorities as part of an investigation into the situation. Robinhood has been indicted more than 50 times and Mr. Tenev was called to testify in Congress.

The controversies didn’t seem to hurt Robinhoods’ growth. The company added nearly 10 million customers in the past year, bringing the expected total at the end of June to 22.5 million. In the first three months of the year, it quadrupled its revenue to $420 million, compared to $96 million a year earlier. It also posted a loss of $1.4 billion, which it attributed to the emergency debt it incurred as a result of the GameStop trade in January.

Robinhood is a growth stock and it has the potential to continue to grow, but the market says this growth is not without risk, said Josh White, a professor of finance at Vanderbilt University, after Robinhoods stock started trading. Maybe it’s not a $32 billion share.

Mr. Tenev, 34, and Baiju Bhatt, 36, founded Robinhood in 2013 with a view to disrupting Wall Street’s entrenched interests. They wanted to invest in stocks quickly and for free via their mobile app. Instead of charging a commission on every trade like traditional brokers, Robinhood sold its client orders to Wall Street firms for a small fee per trade. In the end, many of Robinhood’s traditional competitors cut their trading fees to zero.

The company expanded into other areas. It allows people to trade cryptocurrencies, including the joke currency Dogecoin, which accounted for a third of crypto trading revenue in the first quarter. It expanded into checking and savings accounts, though that launch was an embarrassment after it claimed the product was backed by a consumer advocacy group that doesn’t insure such offerings.

More recently, Robinhood expanded into IPO offerings, including its own. It also said it would soon introduce retirement savings accounts.

Along the way, Robinhood raised more than $2 billion in venture capital. The largest investors include New Enterprise Associates and Index Ventures.

Scott Sandell, an investor at New Enterprise Associates who sits on the board of Robinhoods, said the IPO had created necessary transparency about Robinhoods’ operations.

There has been so much speculation about the company, and much of it is completely false, he said. Now that Robinhood is public, it’s all there for all to see.

In its offering prospectus, Robinhood said that Mr. Tenev and Mr. Bhatt would jointly own 16 percent of Robinhoods stock following the IPO, making their combined stake in the company worth nearly $5 billion. They own a special class of supervoting stock that gives them 65 percent of the voting power of the company.

Robinhood used his IPO to promote himself as a democratizing force in the financial world. In a defiant letter, the founders said that finance is now as culturally relevant as music and the arts, and that they were haunted by news reports that criticized the next generation of investors.

But in the run-up to the Robinhoods listing, some traders said they were already planning to team up to dump or bet against the stock in retaliation for the January trading freeze.

That simmering frustration did not deter Mr Tenev and Mr Bhatt on Thursday. Mr. Tenev said he intended to ignore short-term volatility and focus on Robinhoods’ customers and products.

We cannot control the things that happen in the market, he said. It is a moment in time.

Lauren Hirsch reporting contributed.