KEY POINTS
OVERALL MARKET
Despite the less-than-expected GDP growth, the market indices ended the days with record highs.
The market indices ended the day in the green.
A report by the Department of Commerce was released today, showing a 6.5% increase in the GDP, which is lower than expected. This could be a sign of struggles with inventory and supply chains, or just a slight pullback in growth. Regardless of the reasons, investors seemed to remain optimistic and brought the indices to record highs. GET THE DAILY MARKET RECAP
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Celebrating Robinhood’s IPO (#HOOD)
Before Robinhood's IPO analysis, I'd like to pause a second and celebrate the company’s Initial Public Offering.
Robinhood's IPO is in a sense, a celebration of the entire individual investor community. My fellow Stock Cardians, and even other individual investors that haven't found Stock Card yet, it’s a big day for you all! Today Robinhood went public. There is so much controversy around Robinhood and retail investing these days that it casts a shadow on the significance of this event. Robinhood's IPO is a huge milestone for all of us who believe in owning our financial destiny. We are passionate about investing. We like the thrill of discovering new investment ideas, and we embrace the responsibility that comes with managing our money. I even dare to say we enjoy it! Today, we tip our hats to the Robinhood team and its 22 million+ users. Congratulations! THE GOOD, THE BAD, AND THE UGLY
A deep dive into Robinhood’s growth, revenue, volatility, and regulation worries.
Now, celebrations aside, it's time to take a look at the stock and find the good, the bad, and the ugly. First up: The Good: Robinhood’s branding is a large part of its success. It is one of the more prominent fintech companies, widely known for its accessibility and ease of use for retail investors. The name Robinhood is practically synonymous with retail investing, and that’s a valuable asset. In terms of user engagement, Robinhood's zero fees model and easy-to-use design have led to a highly engaging product. It has more than 17 million monthly active users, and more than 80% are acquired either organically or through user referrals. The company has grown its revenue 245% year-over-year in 2020, and an even greater 309% year-over-year by this March. The company uses rebates from other financial institutions, premium subscriptions, and its own investments to generate revenue. It's a rapidly growing start-up. Overall, Robinhood clearly understands how to benefit from trends and retain customers. The Bad: Pessimism is Robinhood’s greatest enemy. As soon as the market opened, share prices dropped. Although it almost broke even around 1:00 EDT, it was dragged further down into the red during the rest of the session. By closing time, the price had fallen to $34.82. It seems investors are not as excited about Robinhood. The volatility of HOOD stock is worth understanding. The company kept about 20-35% of its shares for sale to retail investors, which I might add, is quite on brand. However, this is higher than most companies, which according to CNBC, tend to keep more of their stock invested with institutions like hedge funds. This allows more volatility, which investors should be aware of. Also, profit-wise, the company is not quite there yet, and may not get there anytime soon. According to Robinhood's S1 document, it "incurred operating losses each year since its inception in 2013 through 2019, including net losses of $6.1 million, $57.5 million and $106.6 million for fiscal 2017, 2018 and 2019, respectively." The Ugly: The sustainability of revenue is a concern of mine. One thing that bothers me about Robinhood's revenue is how reliant it is on options trading revenue, dogecoin trading revenue, and general hype. If you look at the distribution of revenue on its S1 document, the majority of revenue in 2020 comes from Options trading. And, similarly more than half are coming from the 2020 users. Coincidentally, the trading of options has also caused one of the company’s biggest missteps. At the end of June, FINRA fined Robinhood a record $70 million for customers’ losses during the “outages” like during the Gamestop (GME) squeeze, misleading customers, and for approving options trading for customers the company knew should not be trading options. Overall, there is a lot of backlash against the so-called order flow revenue model. If that wasn’t enough, the CEO of Robinhood is currently under FINRA investigation as well for not being registered with FINRA. This is showing the company in a bad light at a time where it needs good publicity the most, but it seems the CEO Vlad will not be found in violation, since he does not directly oversee the brokerage, only the parent company. This may mean the company has to find a FINRA-registered CEO so the two co-founders can step further back from brokerage operations. Can Robinhood maintain the revenue growth? That is the question I'm pondering as I consider investing in the IPO. For now, I think I’ll stay out of the fray. Good brands and well-managed companies stay for a long, long time, and there will be plenty of opportunities to invest. I won't rush in, and let Robinhood hash out some of the ugly regulation and revenue challenges it's currently facing. IPO days are some of my favorites. It’s exciting to watch a company enter the world of public trading. Want to find all the latest IPOs in one spot? Type in "2021 IPO" in the search bar, and click on the “2021 IPO” collection to get a list of all the IPOs this year. FREEDOM PORTFOLIO
Check out Paul Essen’s portfolio, our featured investor and partner of the week.
Okay, let's wrap up by stopping by Paul Essen's portfolio. You can find it on Stock Card's Stock Picks page. Paul and his Freedom portfolio are the Featured investor and partner of the week. He is one of the best long-term investors I like to follow on Stock Card. He and I had a chat about his investment strategy earlier this week. I’ll leave a link to that conversation in the show notes. Drop by Pauls' Freedom portfolio and follow him to get notified of his buys and sells.
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