Why I’m Avoiding Robinhood’s IPO at All Costs

Why I’m Avoiding Robinhood’s IPO at All Costs

It’s one of the year’s most anticipated IPOs.

Millions of investors are counting down the days until this “unicorn” goes public.

But I’ll be avoiding it at all costs… and I suggest you do the same.

That’s because this company just hung many of its customers out to dry.

If you haven’t guessed already, I’m talking about finance disruptor Robinhood.

In a minute, I’ll explain why I won’t be investing in Robinhood’s IPO, which I believe could happen before the end of the year. I’ll also share a safer, more profitable way to cash in on today’s red-hot IPO market.

But let’s first discuss why so many people are looking forward to Robinhood’s IPO.

  • Robinhood made investing accessible to the masses…

It operates an easy-to-use online stock brokerage. Its popular smartphone app lets you buy and sell stocks with the swipe of a button.

That’s one reason Robinhood’s such a hit with young people. But it’s certainly not the only one.

Robinhood was also the first brokerage to introduce zero commissions. It also allows you to buy “partial shares.” For example, you could buy, say, $10 worth of Apple (AAPL) stock… instead of forking over $136 for an entire share.

This is why the company’s called “Robinhood.” It was supposed to serve the little guy, instead of the Wall Street elite.

This has made Robinhood the fastest-growing brokerage in history. And yet, I still wouldn’t invest in its IPO.

  • Lately, Robinhood has been making headlines for all the wrong reasons…

I’m, of course, talking about its role in the GameStop (GME) fiasco.

As I’m sure you’ve heard, shares of GameStop—a brick-and-mortar video game retailer—have been on a rollercoaster ride lately. At one point, they soared over 1,200% in only a week… before plummeting 88% over the same period!

As I explained last week, this buying frenzy all started on an internet forum called WallStreetBets.

In short, an army of retail traders coordinated an effort to buy GameStop’s stock en masse. The goal was to flush out Wall Street hedge funds that were betting against the stock.

It wasn’t the only “hated” stock they targeted, either. These traders also triggered explosive rallies in AMC Entertainment (AMC), Koss Corporation (KOSS), Nokia (NOK), and a handful of other meme stocks.

  • Most of this intense buying took place on Robinhood...

The buying was so ferocious that Robinhood essentially got “margin called.”

In other words, it didn’t have enough capital to accommodate the unprecedented trading activity happening on its platform.

To keep its operations afloat, Robinhood had to raise $3.4 billion in just a few days.

And that’s not the only drastic measure it took.

Robinhood also stopped its users from buying shares of GamesStop and many of the other stocks I mentioned above. It also suspended options on certain stocks.

As if that weren’t crazy enough, Robinhood even forcibly liquidated some of its customers. In other words, it closed option trades that some of its customers had open.

  • Robinhood’s response to the situation was unprecedented…

And it caused a huge controversy.  

Many folks felt like Robinhood hung its everyday investors out to dry.

It’s easy to see why…

By preventing its users from buying GameStop and other stocks, Robinhood killed momentum in these rallies.   

At the same time, hedge funds could still buy and sell these hated stocks at will… saving them billions of dollars.

This clearly angered many people.

The hashtag “DeleteRobinhood” even started circulating on Twitter. Robinhood users also bombarded Apple and Google app stores with poor reviews for Robinhood’s app.

It got to the point where Robinhood’s CEO Vlad Tenev went on CNBC to defend the company’s actions… saying that he “had no choice” but to suspend trading on certain stocks in order to comply with regulatory requirements.

That may be true. But it doesn’t change the public perception of the situation.

  • In most folks’ eyes, Robinhood screwed over the Main Street investors…

…to help Wall Street big wigs.

That’s the exact opposite of what the company supposedly stands for.

This obviously isn’t good news for Robinhood’s brand.

We’re already seeing huge numbers of Robinhood’s users jump ship.

In fact, Robinhood’s rival Webull saw a nearly 1,600% spike in new users in just a few days. It was even the second most downloaded app in US app stores at one point, despite never being ranked in the top 100 before.

Now, this doesn’t mean that Robinhood’s finished. But many of Robinhood’s customers will be looking elsewhere.

And that’s just one of many reasons I’ll be sitting out Robinhood’s IPO.

  • Regulatory scrutiny for Robinhood could pick up significantly…

In fact, the New York and Texas attorneys general both plan to review Robinhood’s handling of the situation.

The US Securities and Exchange Commission (SEC) may also take a close look at the company’s actions during this recent fiasco.

To be fair, I don’t expect regulators to come down very hard on Robinhood. But I can practically guarantee this will shine a spotlight on how Robinhood sells trading data to hedge funds.

Regulators may even force Robinhood to do away with free trading. That would make Robinhood far less attractive to its young users.

  • To top it off, Robinhood will almost certainly command a sky-high valuation when it IPOs…

After all, it was most recently valued at nearly $12 billion in September.

But it will likely go public at a valuation north of $20 billion. By the time the everyday investor gets a chance to buy it, Robinhood could easily be worth $30 billion.

Big, hyped-up IPOs like this often disappoint. This is why I focus on smaller, less talked about IPOs.

So, I’ll be steering clear of Robinhood’s IPO. Instead, I’ll be focusing on smaller, less hyped IPOs.

This strategy has been delivering huge wins to subscribers of IPO Insider, my advisory dedicated to profiting off the world’s best IPOs with massive upside.

In fact, since the beginning of November, my last five recommendations have returned 52% on average. That’s more than five times what the S&P 500 has returned over the same stretch. And my premium portfolio currently has all positions in the green: 14 for 14. And that includes a 385% gain in Fastly (FSLY) and a 385% gain in Cloudflare (NET).

You can learn how to access my latest pick, and all my IPO research, by going here. By clicking that link, you’ll also get all the details behind my #1 trading strategy.

Justin Spittler
Chief Trader, RiskHedge