Robinhood’s biggest business risks as it prepares for IPO

Fri, Jul 2, 2021, 6:18 PM3 min read

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Robinhood Markets filed for an initial public offering and released its Form S-1 Thursday, in a highly anticipated move that gave investors a new look at the company’s finances.

One risk identified in the S-1 is the company’s heavy reliance on cryptocurrency transactions, especially given their inherent volatility. Dogecoin (DOGE-USD), one of the more fluctuant, newer cryptocurrencies, represented a substantial portion of the company’s recent revenue growth.

Dogecoin experienced turbulent growth in 2021, at one point rising over 400% in one week. With much of the increase in crypto transactions attributed to the digital currency, a fall in Dogecoin activity could spell trouble for Robinhood’s bottom line.

“If demand for transactions in Dogecoin declines and is not replaced by new demand for other cryptocurrencies available for trading on our platform, our business, financial condition and results of operations could be adversely affected,” the company said in its S-1.

Fully 17% of the company's revenue in Q1 2021 involved cryptocurrency transactions, a significant increase from the 4% for Q4 2020. Regulations pertaining to the crypto market could negatively impact Robinhood’s future earnings, the report said.

“Future regulatory developments are impossible to predict with certainty,” the company said. “Changes in laws and regulations, or our failure to comply with them, may negatively impact our ability to allow customers to buy, hold and sell cryptocurrencies with us in the future and may significantly and adversely affect our business.”

The company also highlighted cybersecurity risks identified by the New York State Department of Financial Services (NYDFS) in July of 2020. These risks included a number of “matters requiring attention focused primarily on anti-money laundering and cybersecurity-related issues.”

Other risks identified in the S-1 include the ‘meme stock’ frenzy, a phenomena that arose last year most notably with GameStop (GME). Robinhood sparked controversy last January when the company temporarily restricted or limited its customers’ purchase of certain securities after retail investors massively increased the value of GameStop and AMC (AMC) stocks. Dozens of class-action lawsuits were filed against Robinhood in response.

The trading restrictions were placed on AMC and GameStop, along with other speculative securities, in an effort to ensure Robinhood had enough funds to cover regulatory minimums and other user trading requirements. The move received some criticism from retail investors and on social media, but the company defended its actions.

FINRA imposed the largest fine in the agency’s history on Robinhood earlier this week, alleging misleading behavior from the company toward its customers on the subject of margin trading. FINRA alleged that significant damage was done to the “millions of customers who received false or misleading information from the firm, millions of customers affected by the firm’s systems outages in March 2020, and thousands of customers the firm approved to trade options even when it was not appropriate for the customers to do so.”

Some surprise surrounded the company’s revelation of rising revenue ($420 million Jan.-Mar. 2021) but significant losses led by high levels of debt. In the first three months of the year, Robinhood lost $1.4 billion.

Yet the company continues to grow quickly; it doubled its monthly users from 8.6 million in the first quarter of 2020 to 17.7 million in the first quarter of 2021.