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Robinhood delivers a debut like no other: Editor's Views

Emma Rapaport  |  07 Aug 2021Text size  Decrease  Increase  |  
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Robinhood ran an experiment last week. The wildly popular yet controversial US broker, who led a revolution in retail stock trading, allocated a sizeable chunk of its Initial Public Offering (IPO) shares to its own customers. Robinhood (HOOD) reserved about a third of its shares for users of its platform, IPO Access, allowing them to buy shares before they start trading on public exchanges. According to the Wall Street Journal, this is far from the norm. US companies usually allocate less than 10% to retail investors, much of which is snapped up by the wealthy clients of investment banks.

“It’s certainly going to be one of the largest retail allocations ever, in line with Robinhood’s mission to democratise finance for all and give access to everyone what was once reserved for the 1% or the very wealthy," chief executive Vlad Tenev said in a live-streamed roadshow.

It's fair to say that on the day of the IPO, the experiment failed. Retail investors distanced themselves from the company, and the share price declined 8.4% below its IPO price. Posts on Reddit, the platform which drove meme-stock trading, urged investors to avoid the IPO. The shares, which opened at the US$38 offer price, closed at US$34.82 in New York, giving the company a market value of US$29 billion. The IPO price valued the company at US$32 billion. According to a Bloomberg report, retail investors bought US$18.9 million worth of shares, significantly less than the dollars poured into other high-profile IPOs like Chinese ride hailing giant Didi and cryptocurrency exchange Coinbase. Robert Le, senior analyst of emerging technology at PitchBook, attributes the poor stock performance to a combination of factors including the large allocation to retail investors, alongside allowing employees to sell and negative sentiment from outspoken customers.

But shares have since rebounded strongly, and some who supported the stock, including high-profile ARK investor Cathie Wood, have made a motza. It seems a wave of individual investors decided to get in on the action after the first public day of trading, sending the company's market value to a peak of US$65 billion - to the moon, in meme parlance. A whopping 176 million shares changed hands on Wednesday according to FactSet data, prompting a trading halt. Bloomberg's Matt Levine posited several theories in his Money Stuff newsletter including that "meme-investors" only want to get in on a stock following bad news. However, a day later he argued that the real reason the stock rose was that retail traders began gobbling up HOOD options – the very activity Robinhood's business model helped popularise. This gives traders a cheap way to bet on the stock going up or down in price without having to purchase shares. Naturally, this encouraged others to try to profit from the volatility.

Robinhood shares jumped a whopping 82% on Wednesday

Robinhood IPO

 

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What should we make of all of this? It's easy to shrug off this incident as 'just another meme thing'. But as we know all too well, what starts in America often bleeds to this market. Just look at the number of online brokers which have popped up over the last year and are leading the charge to zero commission (following Robinhood's lead). Today, IPO investing in Australia is a largely closed event, restricted predominantly to fund managers, high net worth clients and institutional brokers (unless it's the result of a de-merger). Companies can allocate a portion of their pre-IPO shares to the general public, but many don’t. In the Airtasker IPO, pre-IPO shares in the services marketplace were open to institutions, investors nominated by Airtasker and broker firms. Retail clients could get access only if they were clients of full-service stockbroking firms. The Adore Beauty IPO was much the same. It brings to mind an advertisement micro-investing app Spaceship ran in its early days poking fun at the idea of having a personal investment banker. This suits brokers who offer the IPO around to large clients and quickly fill allocations. It justifies clients paying for a full-service broker at full-service commissions.

However, as online brokers like Stake (eyeing ASX trading) and Superhero (eyeing an IPO) draw in more and more retail investors, I wouldn't be surprised if Australian companies begin to recognise the power of the direct-to-retail block. In a recent LinkedIn post, Zip Co (Z1P) founder and chief executive Larry Diamond noted the buy now, pay later (BNPL) company’s "100k+ strong investor community" and called for disruption in the investor relations (IR) space. "IR is ripe for disruption and we are excited to do our part in democratising access to investor information especially for retail shareholders!" he wrote. Micro-cap companies were observed pitching to Millennial investors at an online conference in June including Gefen Technologies which IPO'd in the weeks following. As Robinhood has demonstrated, IPOs can be great events for brokers, not dissimilar to 'Click Frenzy' or 'Singles Day', encouraging investors to get on the platform and trade.

US suitor

While we're on the topic of BNPL, how can we not talk about this week's big event: Square's (proposed) acquisition of Afterpay. Tipped to be the biggest takeover in Australian history, US-payments giant Square (SQ) announced it would acquire Australia's biggest BNPL player. Afterpay (APT) shares jumped 11.4% on the news. Congratulations to anyone who held the stock (except those who bought it near the high of $160). Commiserations to those who said it was overvalued from $1 to $10 to $100. As Stockspot's Chris Brycki rightly pointed out to me this week, the stock was so influential on returns that managers HAD to have it in their portfolios to do well.

To borrow a phrase from Axios' Felix Salmon, Square didn't pay cash; they printed 'US$29 billion Square dollars' (equity currency), trading at 120 times forward earnings, to buy a no-moat company that is yet to turn a profit nor paid dividends – and in the course diluted shareholders. The reason given: "growth synergies" - integrating more credit and shopping into Square’s Cash App. Looking at Morningstar's pre-acquisition fair value for Afterpay of $75, we think they overpaid. Afterpay is yes, a great Australian success story but if my social media this week is anything to go by, there are cracks in the facade. I won't get behind a business that enables people to pay-off the cost of a burger in instalments while insisting it's not credit. But I also think the argument that the company got rich on the back of manipulating Millennials to overspend doesn't say much about our perception of women's intelligence.

One of many lingering questions is what to index investors? If successful (remember FIRB), Afterpay shareholders will have the option to retain some limited exposure to the company via holding Square shares, either through the NYSE or Chess Depositary Interests (CDI) listed on the ASX. BetaShares’ Australian Technology ETF (ATEC) has a 21% exposure to Afterpay, but will it remain in the index? BetaShares’ Ilan Israelstam told Morningstar they haven't heard official word from S&P, the index provider for ATEC, who will oversee the transition but expects it will likely feature. The questions are at what weight will the Square-CDI join the index, and how will the reweighting process work in future? We'll follow up with S&P to get answers, but how many Australian investors who loved the local Afterpay ride now want to hold a US-listed payments company?

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In Your Money Weekly, Peter Warnes argues that while the Delta variant will delay Australia's economic rebound, it won't derail it.

In Firstlinks, Graham Hand gets stuck into the topic of luck – both in life and investing. He also hears from Magellan's Hamish Douglass on why now is not a time for overconfidence and the mistakes he's made over the last year. Douglass also gets stuck into cryptocurrency – a view that will certainly draw ire.

Investors in Asia-themed ETFs are feeling the burn as Beijing cracks down on some of the biggest names in technology and education. First, there was Alibaba (BABA), then DiDi Global (DIDI). Now, China is cracking the whip again, and this time, it’s Tencent. Morningstar analysts do believe that the market reaction to Tencent is overblown and that the crackdown has opened a swathe of buying opportunities. Check out Lewis Jackson's piece on 3 'moat-y' stocks trading well below their fair value.

If there wasn't enough going on, August reporting season has begun in earnest. This week we heard from a range of companies including lenders mortgage insurance provider Genworth, Newscorp and its real estate classifieds business REA and dual-listed respiratory devices manufacturer ResMed. Pinnacle, which Morningstar recently brought under coverage, has had an incredible year so far with the share price up 116%. The diversified investment firm announced a doubling of full-year net profit and a 100 per cent increase in dividends to 17 cents per share. Read Prashant Mehra's wrap up of week one.

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More from Morningstar:

Afterpay acquisition could set off a ‘wave of consolidation’

Where ETF investors are putting their money in 2021: Charts of the week

Best passive bond ETFs

is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

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