Robinhood's customer ranks grow, revenue soars ahead of IPO

FILE - This Dec. 17, 2020 photo shows the logo for the Robinhood app on a smartphone in New York. Robinhood Financial will pay a $57 million fine and return another $12.6 million to thousands of its customers to settle accusations of a wide range of supervisory failures, such as hurting customers by giving them misleading information and improperly allowing some to make riskier trades. (AP Photo/Patrick Sison) (Patrick Sison, AP)

NEW YORK – Robinhood saw its revenue more than quadruple early this year as the new generation of investors it’s helped empower shook up Wall Street with their newfound trading power.

In a filing with the Securities and Exchange Commission Thursday, Robinhood also said that it wants to sell a big chunk of its stock to those customers and that cryptocurrencies are becoming a much bigger part of their portfolios. It’s preparing to sell its own stock on the Nasdaq for the first time under the symbol HOOD, in what’s likely to be one of the year’s biggest offerings.

Robinhood’s IPO will give investors a chance to own part of a fast-growing company that has rocked the traditionally staid brokerage business. Since its launch in 2014, Robinhood’s popularity has forced rivals to get rid of commissions and to offer apps that make trading easy and maybe even fun.

But as it’s drawn in 18 million funded accounts, with more than half its customers first-time investors, the company has also faced a mountain of criticism from regulators and users alike. Robinhood has agreed to pay more than $130 million in recent years to settle accusations by regulators, with the most recent fine announced just a day earlier.

Among the accusations: It improperly allowed some users to make riskier trades than they were perhaps ready for; it failed to make clear to customers that it makes most of its money by routing their trades to Wall Street firms taking the other side; and its supervision of its technology was weak and helped lead to outages of its service.

And the regulatory scrutiny isn’t finished. The California attorney general's office in April issued an investigative subpoena to Robinhood's crypto trading subsidiary, asking about its trading platform and other matters.

For all the controversy surrounding it, though, Robinhood offers something that’s always in great demand on Wall Street: explosive growth.

Robinhood's revenue rocketed to $522.2 million in the first three months of the year, up from $127.6 million a year earlier. It lost $1.4 billion during the quarter. But that was almost entirely due to a $1.5 billion charge related to cash it raised early this year following a frenzy of trading activity that forced the sudden posting of much more in collateral to the clearinghouses that process trades. It's coming off a profitable year, where it earned $7.4 million after losing $106.6 million in 2019.

Robinhood had 17.7 million monthly active users in the first three months of 2021, more than doubling in a year. They're holding stocks and options and — increasingly — cryptocurrencies. Crypto accounted for 14% of all of Robinhood's assets under custody in the first three months of 2021. That's up from just under 3% at the end of 2019.

Those numbers, though, don't include the further climb for many cryptocurrencies early in the second quarter and their subsequent plunge in value.

“That points to one of the big risks of this company: What does Robinhood look like in a bear market, or even in the next few years after the current boom" in trading by smaller-pocketed and new investors, said Matt Kennedy, senior strategist at Renaissance Capital, a provider of pre-IPO research.

“This company can go public on its first-quarter financials, but any sensible investor would want to see some disclosure of what happened in the second quarter," he said, “and keep in mind that we’re in a historic time” where retail investors have become a much more powerful force.

Robinhood wants to reserve some of the stock in its IPO just for its customers. It expects 20% to 35% of its Class A stock to go directly to customers. The Class A shares being offered in the IPO will have one vote apiece. Robinhood also has Class B shares, which have 10 votes apiece, and are controlled by the company's founders, Baiju Bhatt and Vladimir Tenev.

Robinhood makes the vast majority of its revenue by routing its customers’ orders to big Wall Street firms, rather than the New York Stock Exchange or Nasdaq. It’s something called “payment for order flow,” and other brokerages do it as well.

When Robinhood customers say they want to buy shares of GameStop or Tesla, for example, it often sends the order to a trading firm like Citadel Securities, which will sell the shares. The trading firm pays Robinhood for the flow of orders.

Last year, Robinhood paid a $65 million fine to settle accusations by the SEC that it made misleading comments to customers between 2015 and late 2018 about its main way of making money. The SEC also said Robinhood customers' orders were executed at worse prices than they could have gotten at other brokers.

The company has made moves recently to assuage some of the concerns. In its settlement with the SEC, for example, Robinhood agreed to hire a consultant to conduct a review to make sure its policies comply with federal law, for example.

Earlier this year, Robinhood also got rid of a longstanding punchline for critics who said its app treats investing too much like a game.

Now, when customers make their first trade, make their first deposit or hit another milestone, there is no more shower of confetti that bursts on their screens.