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The Robinhood IPO in Late July Will Likely Be Disruptive

 

The long-awaited Robinhood IPO is scheduled to price on July 28. It will then begin trading on the 29^th. Robinhood said on Monday (July 19) that it expects to offer 55 million shares at $38 to $42 each. The shares will trade under the ticker $HOOD on the Nasdaq.

At $42 a share, the entire company could be valued at $35 billion.

 

Story Within the Story

The underlying “big story” with the Robinhood IPO is that the company is breaking new ground to make IPOs more accessible to “average” investors. This is one area where a high percentage of self-directed investors have not been invited onto the playing field, only those who meet certain income or net-worth criteria. The trading app seeks to make IPOs accessible for more retail investors. Robinhood customers who take part in its IPO Access service can buy initial public offering shares of some deals, including Robinhood. The company prospectus has indicated it will set aside as much as 35% of the shares in the IPO for sale to Robinhood customers through IPO Access.

Background

Founded in 2013, Robinhood offers trading without commissions on stocks and other brokered investments. The company is located in Menlo Park, California, and employed 1,281 last year. It competes against established brokers like Charles Schwab (SCHW), TD Ameritrade (owned by Schwab), Fidelity Investments, E*Trade (acquired by Morgan Stanley), and Interactive Brokers Group (IBKR). These firms have eliminated their online trading commissions in part to more successfully compete with the 2013 entrant into their business.

Most shares offered in the IPO (about 52.4 million) are coming from Robinhood. Additionally, Co-founders Vladimir Tenev and Baiju Bhatt are each selling 1.25 million shares. Jason Warnick, chief financial officer, is selling 125,000 shares, according to the filing. CEO Tenev and Bhatt, who is chief creative officer, will own a combined 100% of Class B stock. Tenev will have 26.3% of total voting power after the IPO; Bhatt will have 39%. 

Robinhood has raised $5.6 billion in funding. This includes $3.4 billion raised earlier in 2021 in a round led by Ribbit Capital.  The prospectus lists 17 investment banks working on the deal. Goldman Sachs and J.P. Morgan are the lead underwriters on the deal. Robinhood, with the updated prospectus, provided estimates for the second quarter, ending June 30. It expects revenue of $546 million to $574 million, more than double the $244 million in 2020’s second quarter.

The company anticipates adjusted earnings before interest, taxes, depreciation, and amortization, or Ebitda, to come in between $59 million to $103 million. This compares to $58 million in adjusted Ebitda for last year’s second quarter. Robinhood also expects 22.5 million funded accounts, a 25% increase from the 18 million funded accounts it reported for the first quarter of 2021.

The popular trading app also foresees losses of between $487 million to $537 million, which it said was partly due to a change in fair value of convertible notes and warrants following its $3.4 billion fundraising in February. This compares to a profit of $58 million.

IPO Access

In addition to vying for Robinhood shares, IPO Access customers will also have a chance to buy stock in two other businesses. Outbrain, which is an adtech company, and Duolingo, an educational website to learn different languages. These are also available through IPO Access.

Take-Away

The playing field keeps changing for individual investors as barriers such as trading fees, charting packages, quality information, and research from websites like Channelchek, become more prevalent.

A move toward clearing the way to more access to be involved in private deals is being given heightened attention. Robinhood has amplified the conversation with their IPO made available to some retail customers.

Registered users of Channelchek can check their SEC-defined qualifications to be shown IPOs available through our parent company by filling out this simple information sheet.

Suggested Reading:

No Cost Brokers Like Robinhood May be Big Winners With Rising Rates

Can Brokers Level the Playing Field for Individual Investors?

Class Action Suit Against Robinhood

Will the Robinhood IPO Further Democratize Finance?

 

Sources:

https://robinhood.com/us/en/support/articles/preipo-trading/

https://www.sec.gov/Archives/edgar/data/1783879/000162828021013986/robinhoods-1a1.htm#ib5a32e8afc3b422193a2f2891a49e0c9_910

https://blog.robinhood.com/news/2021/2/1/robinhood-raises-34-billion-to-fuel-record-customer-growth

 

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The Artworld is Embracing Blockchain Technology

 

While valuations of cryptocurrencies have cooled a bit in recent weeks, NFT art, another blockchain stored intangible, may gain heightened interest and momentum this Thursday, July 15. On Thursday, Christie’s auction house will hold their Art+Tech Summit. If you recall, it was in March 11 of this year that an NFT by Beeple (Mike Winkelmann) sold for $69 million. This drew attention to NFTs in both art and sports memorabilia as the artist had never before sold a print for more than $100. Yet, in the new NFT format, the piece became the third highest-priced artwork ever sold by a living artist. The Christie’s Art and Tech summit will cover and perhaps even help define non-fungible tokens, which are a hot commodity for both the business and art world this year, and an example of how blockchain adds value.

 

What’s NFT Art?

NFT, an acronym for or ‘non-fungible token, is an electronic digital certificate stored using blockchain technology. It provides ownership rights as a digital asset, typically something collectible determined to retain rarity. The NFT format and certificate establish and demonstrate ownership rights of a digital asset, not unlike cryptocurrency.  It is often hard to demonstrate ownership rights on digital works as given how easily digital replication can be made.

NFTs are described as non-fungible since each is unique. The opposite of non-fungible is fungible; here, the item is replaceable; examples of fungible include, a bar of gold, dollar bill, gallon of water, or even a Dogecoin.

An NFT is minted (generated) using computer code and stored on a blockchain system, the process is called a “smart contract.” This NFT smart contract includes information fields including its unique identifier (TokenID); the blockchain wallet address of the owner; and an identifier informing where the digital collectible associated with the NFT can be found. Since blockchain transactions are fully transparent, anyone can view this information, including the blockchain address of the current owner and the blockchain address of each owner since the minting of the NFT.

An NFT can be bought and sold like other property. The transfer of ownership occurs by transferring the NFT through a blockchain transaction to the new owner. When a buyer purchases an NFT, they must have a digital wallet to receive and access the NFT.

 

Taal (TAALF) Virtual Road Show Series – Thursday, July 15 @ 1pm EDT Join Taal Distributed Information Technologies President Chris Naprawa for this exclusive corporate presentation, followed by a Q & A session moderated by Joe Gomes, Noble’s senior research analyst, featuring questions taken from the audience. Registration is free and open to all investors, at any level. Register Now  |  View All Upcoming Road Shows

 

About the Summit

The Christies Art+Tech Summit takes place both virtually, and on location at Christie’s Rockefeller Center galleries in New York. Coverage of the event is expected to bring heightened awareness of the relatively recent collection methodologies and technologies, and could even attract a younger audience than found at other Christie’s conferences and summits. It will feature a mix of lectures, debates, and panel discussions from curators, collectors, art directors, and even a bitcoin billionaire.

 

Take-Away

Blockchain stored NFT art, which may include music, videos, and drawings, is becoming increasingly mainstream.  This week could bring much greater attention since this is the first Christie’s NFT related summit since they successfully auctioned the record-breaking Beeple work. Blockchain technology as an investment (company stock) need not trade in tandem with cryptocurrency values as there are many other uses beyond crypto, both fungible and non-fungible.

Conversation

Paul Hoffman

 

Suggested Reading:

Decentralized Apps (DAPPS) Using Blockchain

Repurposing Powerplants for Cryptomining

Making Sense of Non-Fungible Tokens

Small-Cap Names in a Big Crypto Market

 

Sources:

https://www.christies.com/features/NFT-101-Collection-Guide-to-NFT-11654-7.aspx?PID=mslp_related_features1

https://www.artsy.net/article/artsy-editorial-attract-young-collectors-auction-houses-tap-rock-stars-sneakerheads-spice-girl

https://www.christies.com/features/Monumental-collage-by-Beeple-is-first-purely-digital-artwork-NFT-to-come-to-auction-11510-7.aspx

https://www.barrons.com/articles/beeples-nft-fetches-record-69-million-at-christies-01615502920?mod=article_inline

 

 

 

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Why Microcaps are the New Small Cap Stocks, and How to Adjust

The 2021 Russell Reconstitution, which occurred on the last Friday in June, dramatically changed sector definitions. The market cap dividing line from where the small-cap Russell 2000 Index ends and the large-cap Russell 1000 Index begins became $5.2 billion in market capitalization. This number was only $3.0 billion last year. The 73% jump is massive. On the lower end of the category, entry into the small-cap index last year took $95 million (Limestone Bancorp) in market cap. This year the smallest company in the Russell 2000 had a market cap of $257 million (Velocity Capital). This is more than twice as large – a 171% increase.

The category of small-cap, at least by the well followed FTSE Russell indices, is a relative definition (not dollar amount). Last year, a small-cap may have gained market-cap over 12 months yet still drops down into the microcap category if others grew more. Investors in small and mid-cap stocks should be aware of this as they may not be receiving the same potential for growth in today’s mid and small defined categories than they were when the sectors were all less inflated.

Microcaps
are the “New” Small-Caps

In the past microcap investments have historically received less attention than small-cap, mid-cap and large-cap companies. Noteworthy reasons for this include less scalability for a large fund manager; also, microcaps often have less coverage on the research side. Another impactful oddity is that the whole microcap space lacks a position in the “Investment Style Box.”

Aside from the idea that the capitalization of many Microcaps in 2021 is larger than what were deemed small-caps last June, there are other noteworthy reasons for investors to now explore micro.

The
2021 Case for Smaller

Scalability, research and analysis, and not fitting neatly into the recognized style box all depress interest, awareness, and understanding of high potential companies. Individual investors can take advantage of the less talked about microcap sector and at the same time add diversification that could help key measures of performance.

 

Scalability

Scalability in the smallest of stocks places individuals with average size accounts in an enviable position relative to fund managers. Here’s why: Imagine you’re an equity portfolio manager and have found the “secret sauce” to small company stock picking. You’ve backtested to 5 years with a $100,000 portfolio and the results have averaged 60% winners with a 42% average gain, and the losers and breakeven trades average just a 6% loss. With these results, your firm seeds an account with $10,000. and you now begin to test your methodology with live “ammo.” The methods driving your results include a mix of using trusted third-party fundamental analysis on small company stocks, then a common chart setup to find an entry point. After six months, your results aren’t quite as favorable relative to benchmarks as they had been, but still well ahead of the major market indexes.

The money management firm you work for has been reviewing your results and has now decided to create a fund around your investment style. They market the microcap fund heavily, and over time, with very good performance, it attracts a few hundred million in assets.

With each large inflow to the fund, you find fewer opportunities because your original tested methods had fewer dollars to put to work; being nimble with large dollar amounts is more difficult. Even worse, whereas scaling into a position over the course of a few days with $2,000-$5,000 allowed decent price execution, doing the same with $25,000 – $75,000 or more tends to lift the stock price to the point where the trade may no longer be feasible – if the size is available at all.

Unlike other markets where having more to spend gives you price preference or negotiation power, small investors have an advantage with smaller, less liquid companies. The $10,000 “test” account with a 5% limit per name was able to outperform consistently. The exact same methods but with 100x the assets or more have watered down the success rate dramatically.

This is why there aren’t hundreds of funds run by large companies in the micro sectors. The supply and demand issue would be too challenging. And since the big firms are the ones that push to get on TV to discuss their performance while they bombard us with paid ads, it is their products and stock picks that get far more coverage. This doesn’t mean there aren’t very successful small and microcap money managers, they just don’t often get invited on to a major financial TV show as they aren’t big advertisers or even in need of adding hundreds of millions to any one of their portfolios.

 

Available
Equity Research

The firms that do manage funds and portfolios that specialize in smaller companies rely on their understanding of the company fundamentals. This is another reason individuals may not now be taking full advantage of the smallest of companies – the average investor simply doesn’t find much information written on them, and most investors aren’t capable of digging into the firm’s business model, their financials, or inviting themselves to meetings with management.

So, an asset management firm with in-house analysis can find less heard of companies that are necessarily overlooked by large funds because of scalability, yet the stocks that represent great value can achieve outsized performance.  They are the players with “better” information and opportunity.

Fortunately for those transacting for smaller pools of money or even themselves, if they understand the value of investing in less correlated (vs. S&P 500 or Nasdaq 100) assets, they can now find well-presented research from veteran analysts with bulge-bracket firm pedigree. This top-tier analysis, coupled with low or no-cost brokerage trades, makes small company stocks well worth considering for a prudent portion of an overall asset mix.

 

Image Credit: Morningstar

Style
Box

Since 1992 Morningstar and others that adopted the style box grid have taught investors to think of nine different categories of stock market investing. At the time, Morningstar served those evaluating mutual funds, so the simplicity of boiling it down to a few columns made investor choices easy. However, the reduced complexity is oversimplified and ignores important sectors that can’t easily be scaled up into large mutual funds. There is a reason people are always encouraged to “think outside the box,” for many, it isn’t natural to look beyond what is put in front of them. If we round the style box up to a dozen options by now, including “Micro Value,” “Micro Blend,” and “Micro Growth,”  investors would visually see more of their options and possibly improve diversification.

The massive dollar leap in sector definitions and how this impacts Style Box make-up make exploring what is now called Micro more prudent than ever.

 Take-Away

The extreme growth in terms of company valuations within the major indexes could necessitate investors digging deeper into the smaller sectors, especially since they now contain companies with higher valuations than ever before.

Individuals aren’t as exposed to the less-heralded companies until they become powerful enough to attract attention. The reasons are that media coverage is far less, and for individuals the effort to uncover opportunities may be a bit higher. They could also be mentally stuck inside of a style box that was designed to serve the mutual fund industry. Many stocks defined as micro were well within the definition of small last year. They should be explored with the idea that they may now meet the same valuation definition as you always used, but for other reasons moved to a sector that hasn’t been on your radar.

Channelchek is a resource for exploring opportunities in the small and microcap space. With a growing list of companies covered by top-tier analysts, it is worth regular visits to the website to help find ideas to enhance and diversify your portfolio outside of the very dated box.

 

Paul
Hoffman

Managing Editor, Channelchek

 

Suggested Reading:

Is Biden Tightening the Reigns on Large Companies?

Index Funds Still May Fall Apart over Time

Trading Accounts for Children

IWill the Robinhood IPO Further Democratize Finance?

Sources:

https://en.wikipedia.org/wiki/Morningstar_Style_Box

https://www.ftserussell.com/resources/russell-reconstitution

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Robinhood’s IPO is Likely to be a Big Focus this Summer, Here’s Why

 

Robinhood, the zero-commission investment app that has forever change what it means to be a self-directed investor, disclosed details of their plans to go public in an initial public offering (IPO). Robinhood’s IPO is already highly anticipated as customers of the service turned the markets on its head last year with their self-styled trading methods. As much as Robinhood was a disruptor in the brokerage industry, customers of the service have inspired disruptions to the entire market. Parts of this IPO may allow the company and its users to force even more change.

 

Details

The public now gets to peek behind the curtain as the required disclosures for an IPO bare so much about the private company that was unknown. In a prospectus made available Thursday (July 1), Robinhood states it had 18 million funded accounts for the quarter ended March 31. This customer base is more than double the 7.2 million accounts held at the end of the first quarter a year earlier. They also show a loss of $1.4 billion during the first quarter. Investors ’ determining value will be weighing account growth against revenues amongst a myriad of other factors.

According to the filings, Robinhood Markets, Inc. looks to raise $100 million. There are no disclosures as to how many shares will be offered or the price range. That information is expected to be brought out in future filings. The $100 million is a common “placeholder” number that will change with future filings. The stock’s symbol will be HOOD and will trade on the Nasdaq market. 

There’s a required 15 day waiting period after an IPO prospectus becomes available publicly before the company can begin marketing its IPO. The timeline allows for the company to become listed as early as late July.

The $1.4 billion in losses for the first quarter of 2021 is up from a $52.5 million loss for the same period in 2020. Revenue more than tripled to $522.1 million from Q1 2020 to Q1 2021. Most of the first-quarter losses were the result of a write-off related to a change in the fair value of convertible notes and warrants stemming from a $3.4 billion fundraising in February.

 

IPO Set-Aside for Customers

Robinhood has as part of its business model and mission to “Democratize Finance for All” this includes working to avail individual investors to IPOs. Customers of Robinhood, who use their IPO Access, can buy shares of certain offerings. The company is setting aside as much as 35% of the as yet issued shares in the IPO for sale to Robinhood customers through this IPO Access feature, (see prospectus).

 

Additional Info

Robinhood has raised $5.6 billion in funding. That includes $3.4 billion earlier in 2021  in a round led by Ribbit Capital with participation from existing investors including ICONIQ Capital, Andreessen Horowitz, Sequoia, Index Ventures, and NEA The firm was valued at nearly $12 billion before the IPO – that number is expected to hit $40 billion or more by the time of the offering.  The prospectus lists 17 investment banks working on the deal. Goldman Sachs and J.P. Morgan are the lead underwriters.

 

Take-Away

Retail investors are being liberated by technology, innovation, and competition. With greater freedoms comes greater responsibility to educate one’s self, act responsibly, and follow due diligence best practices. Channelchek is a resource for investors to dig a little deeper into the small and microcap sector to aid in assessing risk/reward possibilities.  Register to receive our daily research and reports here.

 

Suggested Reading:

How Rising Rates Could Make Brokers Like Robinhood More Profitable	Class Actions Suit Against Robinhood

Can Small Investors Compete With Wall Street?	A Feather in the Cap of Robinhood Traders

 

 Sources:

https://blog.robinhood.com/news/2021/2/1/robinhood-raises-34-billion-to-fuel-record-customer-growth

https://www.sec.gov/Archives/edgar/data/1783879/000162828021013318/robinhoods-1.htm

https://www.lw.com/thoughtLeadership/lw-us-ipo-guide

https://www.lw.com/thoughtLeadership/lw-us-ipo-guide

https://www.barrons.com/articles/robinhood-ipo-files-to-go-public-51625161493

https://blog.robinhood.com/news/2021/2/1/robinhood-raises-34-billion-to-fuel-record-customer-growth

 

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Image Credit: DFB Photos (Flickr)

Stock Market Performance – Looking Back at June, Forward to July

 

The month of June and the first half of 2021 are behind us, and the halftime scoreboard shows investors are way ahead. However, there are some concerns that those in the markets are carrying with them into July that won’t soon go away. Top on this list is inflation measurements have surprised on the high side over the past few months. Whether this is a long-term trend and part of the new normal will have to either confirm itself in the next few inflation prints or demonstrate it is transitory as the Fed would have us believe. The market’s fear is that stocks are priced for an easy policy (low rate, cheap money) for another year or two. If the Fed moves to tap the economic brake pedal earlier than built into stock prices, the reaction could be cascading stock, bond, and real estate values.

The next scheduled FOMC meeting is July 27-28. By then we will have seen another round of CPI numbers from which to gauge. We’ll also have a more solid idea of what the final infrastructure spending plan will be comprised of. The magnitude of the money flowing out of Washington to fund projects will help raise profits within the affected industries and make winners out of some companies.

Look Back

The three broader stock market indices we report on, (S&P 500, Nasdaq 100, and Russell 2000) were positive during June. The S&P 500 gained 1.60%, the Russell 2000 rose 1.02% and Nasdaq 100, which had lost 1.62% in May, was the top performer at 5.69% for the month. Throughout June, the Russell 2000, along with the other FTSE Russell Indexes garnered a great deal of attention as Friday, June 25^th was the last day of the old mix of securities making up the index – they reopened on Monday with a reconstitution that significantly lifted the minimum needed capitalization to be included. This was the mathematical outcome based on their guidelines applied to a stock market that experienced significant gains over the previous 12 months.

 

 

Viewing the indices from a year-to-date or six-month perspective, all three are well above their historical average pace. The top performer is the Russell 2000 small-cap stock index. Over six months, this measure of smaller companies increased by 18.94%%. The S&P 500, which measures a broad base of large-cap companies, was up 16.13% for the half-year period. And the Nasdaq 100, which was the overall outperformer for much of 2020, lags the other two indices with a still-respectable 14.65% increase.

 

 

To Further segment the better performing Russell 2000 small-cap index (6-months), Value continues to outperform Growth by a wide margin. While a 10.47% return on small-cap Growth over six months is well above average, it is dwarfed by the 28.13% return provided by small-cap Value.

 

 

Hottest Market Sectors

Over the measured six months (January – June), the industry sectors have rotated positions from late 2020. Energy, which had been beaten up and left for dead through much of last year, rose 46.16%. Financials are up 27.63% in just six months’ time. The Financial sector is benefitting from expectations of a steepening yield curve and a large supply of cash in the system. Communications companies that have benefitted from a growing online economy may be among the beneficiaries of infrastructure spending. The sector was the third-best performer at 20.58%. The worst performing sector for the first half is Utilities. The utility sector provided a 4.44% return, which is still in line with the 8-10% average market return discussed in textbooks and touted by advisors. Utility stocks are popular among retirees for their dividend payments; higher interest rates would provide alternatives for income/dividend investors.

 

 

Take-Away

The economic report to be released in July which carries the most potential impact is CPI. The Bureau of Labor Statistics will make these numbers available at 8:30 EST on July 13.  The statement after the two-day FOMC meeting later in the month also has the potential to be a turning point in sentiment.  Some voting and non-voting members of the committee already have publicly supported beginning to taper the loose money policies sooner than originally planned. Any notching up of rates in 2021 would happen well in advance of the expectations the Fed set for the markets through April of this year.

With this, the most intense volatility could surround July 13^th, with CPI numbers, and July 28^th, after the FOMC adjourns. Other dates worth noting include Friday, July 2, when Nonfarm Payrolls are reported. Coupled with payrolls is the Labor Participation Rate. A low participation rate and high unemployment could suggest future wage inflation as employers find ways to induce needed workers to the open positions. Look for an announcement on July 8 as the OPEC Plus meeting adjourns. Any agreement out of Washington related to a bill passing on infrastructure spending should also impact the markets. If spending is smaller than the $1.2 billion proposed on June 24, 2021, the market could be disappointed.

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading:

Stock Market Performance – Looking Back at May, Forward to June	Inflations Impact on Stocks, Four Scenarios

Money Supply is Like Caffeine for Stocks	Who Benefits from the American Jobs Plan?

 

Sources:

WWW.BLS.gov

https://app.koyfin.com/home

https://www.whitehouse.gov/briefing-room/statements-releases/2021/06/24/fact-sheet-president-biden-announces-support-for-the-bipartisan-infrastructure-framework/

 

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