Breakingviews: Robinhood spoons up taste of own medicine

Here’s some comfort for Robinhood Marketsfounder Vlad Tenev: What happens to a company’s shares the day of an initial public offering says little about what happens later. The share price of Tenev’s digital brokerage fell around 8% on Thursday from its $38 launch price a day earlier, already set at the bottom of the range. Nonetheless, first impressions matter more to Robinhood than to the typical market noob.

Many companies start out poorly and then come good. Facebook barely got higher than its IPO price on day one in 2012, yet an investor who put in $1 then would have $9 now. Conversely, now-forgotten search engine Ask Jeeves more than quadrupled in value as a Nasdaq debutant in 1999. In the 40 years to 2019, the average offering popped 13% and then underperformed the market by 14% over three years, according to IPO-watching academic Jay Ritter, excluding issues from the turn-of-the-century internet bubble.

Valuation is particularly complicated at Robinhood. Customers are suing for various perceived slights, a watchdog wonders why Tenev isn’t officially registered as a financial adviser, and Robinhood’s commission-free model is being scrutinized by regulators. Tenev also planned to allocate up to 35% of the company’s shares to customers. That’s not a bad thing and may have made the IPO pricing more accurate, but it is experimental enough to keep some investors at bay.

Robinhood in any case raised $2 billion or so, which subsequent share price moves can’t take away. The snag is that there may be a feedback loop between Robinhood’s stock price and its future ability to generate cash. If markets appear to cool down, so will its mainly retail customers, who have grown accustomed to the value of their investments going up. In one ominous sign, battery maker Clarios International on Thursday postponed its own float.

All this is not without a silver lining. Robinhood’s market capitalization was around $29 billion by Thursday’s close, suggesting underwriters Goldman Sachs and JPMorgan were not far off with their pricing and that IPOs can still generate sensible valuations. It’s a topsy-turvy world where a company fueled by speculative share trading becomes an advertisement for rational markets.

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