Robinhood released an S-1/A filing detailing its first IPO price range this morning. The company first filed to go public in early July after raising billions earlier in the year.
The well-known U.S. consumer fintech giant intends to sell shares in its public market debut at a price between $38 and $42 per share. Robinhood is selling 52,375,000 in its IPO, worth $2.0 billion to $2.2 billion. Another 2,625,000 are being offered by existing shareholders, while its underwriting banks have the option to purchase a further 5,500,000 shares in the transaction.
All told, Robinhood could see shares trade hands worth just over $2.5 billion in its IPO at the top end of its initial price range.
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We want to know Robinhood’s simple and diluted IPO valuation ranges, and we want to dig into the company’s newly released preliminary Q2 2021 results. Then we’ll do some fun math to better understand just how rich, or not, Robinhood’s current price range seems to be. From there, we’ll discuss whether we expect to see Robinhood raise its price range before it debuts.
Sound good? Let’s get into it.
What’s Robinhood worth?
We’ll start by calculating a few valuation marks for Robinhood to help put its $38 to $42 per-share IPO price range into context.
First, Robinhood’s post-IPO simple share count is expected to be 835,675,280, not including shares reserved for possible underwriter purchase. That share count values Robinhood at $31.8 billion at $38 per share and $35.1 billion at $42 per share. Those figures rise by $209 million and $231 million, respectively, if we count the 5.5 million shares that its banks may purchase as part of the IPO.
But what folks will want to chat on Twitter about is the company’s fully diluted valuation. At the midpoint of its price range, Robinhood is worth more than $38 billion when shares tied up in vested RSUs and options are counted. That figure lands around $40 billion at the top end of Robinhood’s price range.
Robinhood would therefore be worth $35 billion, calculated using a simple share count, or as much as $40 billion if more equity is counted. Both numbers are fucking huge and indicate that Robinhood’s ascent in the last 18 months from breakout unicorn to category-defining upstart is about to be embraced by the public market, provided that it prices at least in range.
How do those prices feel, given our read of today’s market dynamics?
How is Robinhood doing?
At a very high level, Robinhood managed to best its Q1 2021 results in the second quarter. During the second three-month period of 2021, Robinhood expects to record between $546 million and $574 million in revenue. Against that figure are $536 million to $486 million in operating costs. In turn, those paired ranges yield net losses of $537 million and $487 million, respectively.
But don’t worry, adjusted metrics fans. The company’s adjusted EBITDA for the second quarter is expected to range from $59 million to $103 million.
Recall that in the first quarter of 2021, Robinhood had revenues of $522.2 million and a net loss of $1.44 billion, though that loss figure was not representative of the company’s operating performance, exaggerated as it was by a $1.49 billion accounting charge.
In the company’s year-ago Q2, $244 million in revenue generated a net income of $58 million and adjusted EBITDA of $63 million.
We lack greater visibility into how Robinhood managed to turn its record-breaking quarterly Q2 2021 revenue into such steep net losses. It may be that another accounting charge is at play, which would defang its net losses to a large degree. What is clear is that Robinhood’s cost base has expanded massively in the last year, from operating expenses of $186 million in Q2 2020 to a midpoint figure of $511 million in Q2 2021. That’s steep.
Update: As we expected, an accounting charge was at play. From the S-1/A, “The [Q2] net loss is primarily driven by the factors mentioned above as well as the change in fair value of convertible notes and warrant liability of $528 million […] which was marked-to-market as of the end of the three months ended June 30, 2021.”
Circling back to revenue: At the midpoint of its range, Robinhood generated $560 million worth of top line. That shakes out to a run rate of $2.24 billion. At its $35 billion, top-end simple valuation, Robinhood is worth 15.6x its run rate. At its maximum, fully diluted IPO price, that figure rises to 17.9x.
Those are not cheap multiples. But they are also not incredibly high, either. Indeed, they are lower than the average revenue multiple for public software companies today — Bessemer pegs that figure at 20.5x.
What gives? Why is Robinhood pricing at what feels like a discount to present-day software incomes? Two ideas:
- The current IPO price range is conservative, and Robinhood expects to price more aggressively.
- Investors are not willing to give Robinhood a SaaS multiple because consumers are more fickle than business customers.
I suspect that our second point will hold true even if our first point bears out and Robinhood raises its range. The company would have to reprice very sharply higher to get into the upper half of SaaS valuations, looking at today’s cloud run rate multiples. It probably won’t happen.
Robinhood is therefore getting hit with a bit of the video game tax. Explained in simple terms, gaming companies don’t get software prices when they go public. Why? They are episodic and somewhat hit-based; a great game can boost figures but a clunker can whack them. Investors, therefore, price those companies — despite attractive margins! — at a discount to SaaS firms that sell to large companies, which feature rock-solid revenue stability.
Because Robinhood deals with consumers, who might decide to trade less in time, it has more uncertainty in its future growth than, say, Zoom. So it will trade at a discount to companies with similar margins and growth rates, but stickier top line.
To that end, observe the following riff from the company’s latest filing:
We expect our revenue for the three months ending September 30, 2021, to be lower, as compared to the three months ended June 30, 2021, as a result of decreased levels of trading activity relative to the record highs in trading activity, particularly in cryptocurrencies, during the three months ended June 30, 2021, and expected seasonality.
That’s precisely what we’re talking about.
Do we think that Robinhood will raise its range? Perhaps. We’d put it at 50/50 today, looking at its somewhat modest Q1 to Q2 growth rate, even though its year-over-year growth proved spectacular in its most recent quarter.
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