The Robinhood share price slumps post-IPO! Here’s why I’m not touching it

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Robinhood (NASDAQ: HOOD) became the latest high-profile IPO of 2021 this week. The shares debuted in the US at $38 and finished down 8.4% after the first day of trading. The initial fall didn’t surprise me, and I think that the Robinhood share price could have further to fall. Here’s why I’m not going to be investing any time soon.

The backstory of Robinhood

Robinhood is an investing platform, geared towards new retail investors. The name comes from the famous English character, with a desire the make investing more accessible for all. To this end, it offers commission-free trading on stocks and other assets.

So how does the business make money? One way is on the balances held by clients on account. It doesn’t pay interest, but it gets paid interest from banking counterparts. It also makes money on lending, as it allows clients to trade on leverage. Finally, it sells on the trade information and order flow to institutional investors.

The company only launched less than a decade ago, but has developed a high profile among retail investors in the US. It has 18m customers, and claims that since 2016, around half of all new US investors have been signing up to Robinhood. With an average revenue per client of $137 in Q1, the business is now profitable. This is largely thanks to the boom in retail investing over 2020, fuelled by crypto and Reddit stocks.

In fact, the reliance on retail trading was seen with the IPO, with 25% of Robinhood shares being allocated to retail investors.

Why I’m staying away from the Robinhood share price

All of the above sounds positive. A young, high-growth business that’s getting high sign-ups and is making a profit. Yet underneath the surface, there are several red flags that make me want to stay away from the Robinhood share price.

It sells order flow to larger companies, to do with it what they want. This is a fairly controversial practice and it has been fined in the past with issues relating to this. In fact, it’s against the law in the UK to accept payment for order flow. I’d imagine this is a major reason why Robinhood isn’t available in the UK.

This is a negative to me for several reasons. It’s a large source of revenue for the company, and so if this practice gets banned then it could see a negative impact on the share price. And it could hold back further growth into new markets (such as the UK) as it doesn’t comply with local regulations.

Another point I’m concerned about is the reliance on crypto and Reddit stocks. Some 34% of crypto revenues from Q1 this year came from Dogecoin! Such assets are popular at the moment, but is it really sustainable to rely on unconventional stocks and coins to build a market-leading business? I don’t think so.

These are just my personal concerns. The Robinhood share price could rally in the future, avoiding regulatory issues and diversifying the product offering to create a more sustainable brand. It has a good presence in the market already, so has a position of strength to build on. However, I’m personally going to be staying well away from investing in it.

The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of investment advice. Bitcoin and other cryptocurrencies are highly speculative and volatile assets, which carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

The post The Robinhood share price slumps post-IPO! Here’s why I’m not touching it appeared first on The Motley Fool UK.

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jonathansmith1 and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.