Why Robinhood IPO Investors Are Facing 'Alarming Risk'

Robinhood Markets Inc. HOOD is expected to finally take the plunge and complete its highly anticipated IPO this week, but one expert says investors should take a very cautious approach to Robinhood.

The Thesis: David Trainer, CEO of New Constructs, said Robinhood will be incredibly overvalued if its IPO values the company anywhere close to the $35 billion valuation that analysts are anticipating. He said Robinhood faces a unique set of risks that make the stock an even bigger gamble than the typical high-growth tech IPO.

“We think the stock is worth no more than $9 billion and that Robinhood will likely not be able to continue the robust growth it saw in 2020 due to looming regulatory risk, increasing competition, and an undifferentiated service,” he said.

In fact, he said traders would be more likely to make money trading meme stocks in their Robinhood accounts than investing in the Robinhood IPO.

In particular, Trainer said Robinhood’s primary revenue source, payment for order flow, is facing growing regulatory risks.

Related Link: 'Bad Omen' For Meme Stocks And The Retail Trading Boom? Here's What The Data Says

But even if PFOF is safe, he said a $35 billion valuation implied Robinhood will grow its revenue by another 3,000% by 2030 and outgrow established online brokers, such as Charles Schwab Corporation SCHW.

Schwab currently has 30 million accounts compared to Robinhood’s 18 million accounts. Schwab has about $223,000 in assets per account, however, whereas Robinhood has only about $5,000 per account.

Finally, Trainer said Robinhood’s unprecedented decision to allocate up to 35% of its IPO shares to its own retail traders creates significantly more risk of downside volatility in the near term.

Trainer has an Unattractive rating for Robinhood shares.

Benzinga’s Take: Trainer called Robinhood a “bad bet for investors with alarming risk.” It may be worthwhile for long-term Robinhood investors to consider holding off on buying for six months or a year until the dust settles on the stock to avoid the initial risks that come with such a unique and high-profile IPO.