Is SpaceX really worth 1.78 Trillion? (From InvestPub)

In a latest announcement from CEO Vlad Tenev, financial services giant Robinhood Markets (NASDAQ: HOOD) continued to show a knack for entering new business lines.

According to Tenev, Robinhood Securities, a subsidiary of Robinhood, is now approved to serve as an IPO underwriter.

Notably, Robinhood has already been a participant in the IPO market for years.

The platform has allowed retail investors to gain early access to IPOs—a privilege often reserved for institutional investors..

The announcement meaningfully changes Robinhood’s position in the IPO arena. However, in isolation, is this move a large growth opportunity for Robinhood, or is something more strategic at play?

Robinhood Could Gain a Bigger Seat at the IPO Table

As noted, Robinhood has not been absent from the IPO space whatsoever. In 2021, the company rolled out its IPO Access product. With this, retail investors had “the opportunity to buy shares of companies at their IPO price, before trading on public exchanges.”

This was a value-additive feature, especially given that stocks going public sometimes spike before trading on the exchange. Still, just because investors requested shares did not mean they would actually receive them.

During the IPO access phase, Robinhood was only a “selling group member." In essence, the firm received a small amount of the overall IPO allocation from dominant players like The Goldman Sachs Group (NYSE: GS). It would then distribute those shares to Robinhood users. Now, the company could potentially be an underwriter in deals, standing on more level ground with investment bankers, rather than being clearly below them. This would give Robinhood a say in IPO pricing and allocation.

In turn, Robinhood could gain a larger allocation of shares to distribute to users. The company would also receive underwriting fees in addition to the concession-selling fees it earns under the selling group model.

As an approved underwriter, Robinhood could potentially get a seat at the “big boy” table where traditional investment banks rule.

Why Now: The Retail Market for IPOs Is Growing

Notably, just because Robinhood is legally allowed to be an underwriter doesn’t mean that issuers have to include it in deals. There has to be something in it for them.

Thus, what makes this move interesting now is that retail investors are becoming increasingly interested in IPOs. As Morgan Stanley notes, “Retail investors—already a significant force in daily equity market liquidity—are becoming increasingly important participants in IPOs… For issuers, retail demand can be a strategic component of deal construction and aftermarket performance.”

The critical line here for Robinhood is ‘retail demand can be a strategic component of deal construction.' In other words, because retail interest in IPOs is on the rise, issuers should potentially consider them more when thinking about how to allocate shares.

Morgan Stanley's statement somewhat echoes Tenev’s more bold statement: “Since IPO Access launched in 2021, we've watched retail go from an afterthought to a key part of how companies plan an IPO. The question changed from 'why allocate to retail at all?' to 'how big can the allocation be?'

With Robinhood being one of the most widely used retail investment platforms, this dynamic could make it more likely to gain underwriter status on deals. In turn, the company would be more likely to actually gain the benefits outlined.

IPO Underwriting Market Size: Fees Aren’t the Point

While underwriting fees would mean real revenue for the company, it is important to gain perspective on how large an opportunity this could actually be for Robinhood. Notably, Goldman Sachs' equity underwriting revenue was $535 million last quarter, or $2.14 billion if annualized. Within this, IPO fees are only one portion of that total.

As a rough estimate, assume IPO fees represented half of the total, or $1.07 billion annualized. Growing to 20% of Goldman’s IPO business long-term would likely be a success, if not an aspirational goal, in Robinhood’s mind. Doing so would equate to around $214 million in annual revenue, or 4.6% of Robinhood’s last 12 months' revenue of $4.61 billion. Thus, the potential for Robinhood to drive growth through the IPO underwriting market is not particularly large, but not insignificant either.

However, the largest benefit of entering this space likely isn’t about generating IPO-specific revenue at all. With this move, Robinhood can continue to attract and retain retail investors to its platform. As IPO interest among this group rises, offering larger allocations of IPO shares would likely be a draw for many customers. The more customers it brings in through this offering, the more Robinhood can get those customers to use its other offerings.

Transaction revenue across equities, options, and crypto—where Robinhood makes the bulk of its revenue—could receive a meaningful uplift as users rise. Overall, Robinhood’s IPO underwriting push may not be a needle mover in and of itself. However, more importantly, it clearly reinforces the company’s core value proposition—being a one-stop shop for retail investors. By expanding its IPO offerings, Robinhood protects the strong position it has built in this industry.

Read this article online ›