For those that haven’t read Robinhood’s 360-page S-1 and subsequent registration amendment, some brief observations follow on some of the most egregious aspects of one of the most one-sided, enrich the insider casino offerings I’ve ever seen, and there have been some doozies. 1/
If Robin Hood robbed the rich to give to the poor, the modern-day version is now in the business of gutting the sheep and pocketing the wealth of the retail speculator for himself. Fleecing at least. “Robinhood is democratizing finance for all,” reads the prospectus. Sure. 2/
Robinhood, who in December paid a $65 million fine (without admitting or denying guilt, wink) for best execution and payment for order flow alleged violations, will raise on the order of $2.3 billion from new shareholders in its upcoming IPO. What does The IPO investor get? 3/
The expected $2.3B brought to the party by new shareholders represents almost 30% of all of capital raised since 2013, including proceeds raised in the offering. For their money these new "investors" will only own 7% of the company and far less voting rights. Dilution, baby. 4/
Including proceeds from the IPO, the VAST MAJORITY of capital will have been raised just in the past two years, mostly 2021. Reread the breakdown of how much capital the IPO buyers are investing and what percent of the company they will own. This makes SPACs look non-dilutive. 5/
From its founding in '13, $HOOD raised $5.6B in a series of $2.2B convertible preferreds and 2 tranches of $4.7B in converts (the converts sold just this year). Additional paid in capital totals $149m. The balance sheet has $4.8B cash with shareholder equity a negative $1.5B. 6/
Most of the negative equity value reflects “losses” on the degree to which converts issued in February are already “in the money.” They were money good at issue! More on this in a bit. The IPO will sell 55 million shares, with the founders & CFO selling 2.6 million of those. 7/
An over-allotment option for another 5.5m could bring the total to 60.5m shares sold at an expected range of $38-$42 per share. Using the midpoint, the company may raise $2.3B, bringing cumulative capital raised to $7.9B. At $40, Robinhood will have a market value of ~$33.6B. 8/
Remember, this is against $7.9B in cumulative capital raised, including proceeds from the IPO. In their generous hearts of hearts, 25% to 30% of the shares offered in the IPO are "reserved" for Robinhood “customers.” That’s 13 to 16 million shares at a midrange $40 per share. 9/
That’s $500 million to more than $600 million. Rob from the fools, give to the poor insiders. What a deal. But it’s a brokerage firm. With capital requirements. Growing revenues will require new capital, either retained profit or new capital. Regardless, let’s talk dilution. 10/
What’s missing from outstanding shares at 3/31? Hold on to your wallets.

There are $2.55B in tranche 1 converts outstanding which will be exercised at the LOWER of 70% of the IPO price or $38.29. Assume at $28, which at an IPO price of $40 yields a quick 42.9% gain or $1.1B. 11/
The converts were sold in February 2021, not bad for 5 months of ownership. If the IPO is wildly oversubscribed and prices north of $55 per share, the option holders get in at no higher than $38.29. The only way the converts were anything but free money was if no IPO ensued. 12/
There are $1.03B in tranche 2 converts outstanding which will be likewise exercised at the LOWER of 70% of the IPO price or $42.12. Again assume at $28, which at an IPO price of $40 yields the same quick 42.9% gain or a gain of $441m. Same deal as above. Quick. Free. Money. 13/
These converts were also sold in February 2021, again not bad in 5 months of ownership. Who wouldn’t invest at 70 cents on the dollar if an IPO was coming tomorrow? On both tranches of converts, buyers were further rewarded with 6% interest in the interim. Payable in shares! 14/
There are 369 million warrants outstanding. These were issued to the convert buyers and are likewise exercisable at 70% of the IPO price. Yep.

There are 18,096,127 A share options outstanding with a strike price of $2.23 per share, a net value to the owners of $683 million. 15/
There are 39.1m “time-based” RSUs outstanding. At a $40 price these have $1.6B of pre-tax value. Not bad. The company will withhold the tax liability.

There are 27.7m (I think that’s the #) 2019-class “market based” RSUs out that vest at the IPO. Graduated hurdle is an IPO! 16/
There are 35,520,000 2021-class “market based” RSU shares outstanding that vest at the IPO. These will have $1.42B of value at a $40 IPO price. Not bad for a few months of ownership. These were granted in MAY - TWO MONTHS AGO. Brilliant timing. What luck. 17/
There are 27.8m shares set aside for future SBC. This is a $1.1B set-aside for insiders. In total, an additional 14% dilution is authorized.

There are additional shares set-aside for an Employee Stock Purchase Plan, offering new shares at a discount to market value. Why not. 18/
Any A-share RSUs vested and exercised by the founders can be converted to uber-voting B shares upon exercise.

There were 230.7m shares outstanding (vested and held by insiders/private owners) at 3/31 (before the IPO). After the IPO, the share count stands to be ~840 million. 19/
New shareholders will bring $2.3B to the party, over 29% of all of the capital raised since 2103. For their money they will own 7% of the company. Did I already mention dilution? Wait until you see the dilution in book value and evisceration of per share book value. 20/
Cash in the firm will total about $7 billion with the addition of proceeds from the IPO. So how do you get to a ~$34B valuation?

On fundamentals, 2020 REVENUES totaled $959m. 3/31 quarterly revs were $522m & 6/30 are estimated by the company at a range of $546 and $574m. 21/
At the midpoint, sequential revenues were up 7.3%, growing fast but decelerating in a hurry...In fact, monthly revenues in March of this year actually declined from February.

The company reports $81 billion in assets under custody at March 31 and 18 million accounts. 22/
That works out to a whopping $4,444 per account (the median must be even WAY lower). The company further reports annual revenue per user of $137. No doubt some averaging is involved, but what they don’t report is that $137 in revenues from a $4,444 account is 3% per year. 23/
On those 18 million $4,444 accounts, total assets under custody break down as:
$65 billion in equities (AMC, GME & TSLA for sure)
$2B options
$11.6B crypto (up from $3.5B at 12/31 & $481m a year ago)
$7.6B cash
($5.4B) margin
Total assets under custody total $81B. 24/
14% of customer assets are crypto! You don’t see any bonds. You don’t see any mutual funds. Half of transaction revenue, which are 81% of firm revenues, come from OPTION rebates, while options at market value account for only $2B of customer assets. Tell me its not a casino. 25/
Option trading should definitely be allowed for the inexperienced, small, retail "investor." This is how you get experience, and initiated. On assets held as crypto, these “assets” can neither be transferred in our ACAT’d out. They must be transacted while in the hood. 26/
The company naturally collects transaction fees from its trading partners and "can not guarantee the risk of a hack or theft." Most crypto is stored in “cold pockets” but, of course, no SIPC protection exists on crypto. I can't imagine anything untoward or going wrong here. 27/
17% of firm revenues were earned in Q1 from crypto transaction “rebates,” up from 4% in the prior quarter. Wile $HOOD supports 7 cryptos for trading, no less than 34% of crypto revenues were from DOGECOIN! Hilarious reading this. I'm probably wrong about this being a casino. 28/
In the first quarter alone, “customers” traded $88B of crypto against $11.6B held at 3/31 and $3.5B at year-end 2020. Definitely not a casino, but a platform encouraging the long-term ownership of investments. You think new "customers" learn all about the coffee can approach? 29/
Robinhood further discloses that 81% of Q1 revenue came from selling equity and option order flow to 4 market makers, up from 75% of revenue during 2020. Regulatory issue on the horizon? Durability of "moat" issue? It's in the Risk section, but so is lots of boilerplate. 30/
Reasons for concern? In the first quarter, the company lost 5% of account value to transfers out, versus a quarterly average of 1.2% in 2020. Hopefully not a trend, particularly since customers cannot transfer crypto in and out. That said, crypto transactions = revenue! So...31/
The two company founders will own 135 million shares, 16% of those outstanding after the IPO with a value of $5.4 billion. If viewed as a percent of cumulative capital raised, including the IPO, that’s 68% of capital on virtually nothing invested. Ambitions on space travel? 32/
Voting control through super-voting B shares give the lads 65% of the vote. Lockups for insiders and newly converted shareholders are benign. A flood is coming, but only after the share price reaches certain thresholds triggering the vesting of additional performance shares. 33/
The CFO and Chief Legal Officer were each paid more compensation in 2020, mostly in shares, than Berkshire Hathaway’s two operating Vice Chairmen, Greg Abel and Ajit Jain are paid, all in cash, each year to operate the largest company in the world by fixed tangible assets. 34/
The CFO & CLO, non-founders, were each given shares that at a $40 IPO will be valued at almost $100 million each. The CFO signed on in Dec 2018. The CLO joined up in May 2020, so just over a year in. The good news is he was CLO at Mylan, so knows his way around a courtroom. 35/
The valuation seems insane, but will be “justified” because the company is a FinTech player. By comparison, Schwab’s market cap is $128 billion on $58 billion of book value and $5 billion of profit. Profit at Schwab is more than twice Robinhood’s total revenues. 36/
Schwab’s assets under custody (larger retail & institutional clients) total $7.5 trillion on only 31.5 million active customer accounts. Fewer than 2x the accounts but nearly 100x the assets under custody with a valuation only 3x as great as the expected valuation of $HOOD. 37/
Bully for those investing $5.6 billion in Robinhood prior to the IPO. Their investment plus shares given to founders/insiders will own 93% of the company post-IPO, which at a $33.6B valuation represents a $31.3B position & a gain of 650%, mostly earned over the past 2 years. 38/
Brokers have capital requirements, of which Robinhood has been short of at times. Schwab earns a roughly 10% ROE over time. The IPO will remedy capital need, for now. But a firm highly levered to selling customer order flow, rebates on crypto transactions and margin interest? 39/
Equity, option & crypto trading are advertised in the prospectus as, “commission-free.” Um hum. Costless to the unwitting "customer." The business wins only if the “customer” transacts or borrows. This is good for society? Know that Robinhood's shave is only part of the cost. 40/
Citadel doesn't pay for flow for grins. The platform is not encouraging the long-term investment of patient capital. What I do know is that on a successful IPO, there will be corks a-popping in Menlo Park. This is massive dilution and delusion about valuing a retail broker. 41/
Rob the unsuspecting and keep the gold, or the crypto, is sadly the new Robin Hood. In a week where @GaryGensler famously introduced himself to Twitter, perhaps he has room on his plate for this one. The IPO is what it is. The way the company makes money, on the other hand...42/
@GaryGensler On the IPO, its all there in black & white in the S-1. None of it is illegal. Moral? Surely contemptable. If you like investing in IPOs, where sellers are selling for a reason, and if you like being diluted by people who are in the business of taking, get your subscription in.

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More from @ChrisBloomstran

4 Jul
Outside of the financial reporting of certain car companies, SPAC promoters and countless others, I haven't read fiction in ~30 years. Limited, I know. Outside of investing/business reading, I love US history, particularly the American Revolution. In the spirit of the 4th, 1/
I thought it would be fun sharing some favorites. Mostly bios and written from the "great man" perspective. To McCullough, Adams was the greatest; but to Chernow and Ellis it was Washington. Of course, when Ellis wrote on Jefferson he was the man and so forth. All were great. 2/
What's remarkable about these giants of the revolution is the risk they took in rebellion from England. Captured, the signers of the Declaration and other revolutionaries would have hung. It's amazing how young many of them were. Franklin was the elder statesman at age 70. 3/
Read 11 tweets
3 Jul
Happy Independence Day! 🇺🇸🎇 Doing some quarter-end portfolio/index maintenance before the pyrotechnics and some interesting observations about S&P 500 index sales and earnings. Expect some negative surprises on the horizon given an extrapolation of what appears to be a boom. 1/
Index sales per share fell 3.7% in 2020, but the share count rose 1.8%, as it does during crises when companies need money but shares are cheap. Buy high, sell low. Overall dollar sales thus declined only 2.0% from $11.72T to $11.48T. 2/
EPS (operating, so pre writeoffs) fell 22% from $157.12 to $122.37. A huge recovery in profit & sales is underway. Wall Street pegs EPS at $187.30 & $210.69 for '21 & '22. Let’s assume a full recovery in dollar revenues to a linear 2.5% nominal growth from 2019 through 2022. 3/
Read 13 tweets
19 Jun
Upon further review, looks like you crowned yourself the next Mr. Buffett and Berkshire Hathaway in your past THREE annual letters, @chamath. Two weeks ago we had some fun digging in to your selected disclosure methodologies, didn't we? But oh my does it get even more bizarre. 1/
I’ve now had the misfortune of reading all 3 and am stunned at the apparent need to bend, break really, the facts to make your performance shine. Let’s examine your comparison to $BRKA in your past three letters, digging yourself a hole in 2018 and burying yourself in 2020. 2/
Book value, skip a year, book value, stock price. That’s YOUR selected method for Berkshire as a benchmark moving target. You can’t make this stuff up. Curiouser and curiouser, to quote Alice, can be the only way to characterize the unusual presentation of your performance. 3/
Read 38 tweets
5 Jun
Bravo Tesla on "improved" disclosure. When screwing the customer, let 'em know it up front. Gas is at prices last seen in '14, so good thing for a Tesla's gas savings - except you already paid for it. What? Let’s build a car. How about a practical Model 3. Base price $35,690. 1/ Image
Recently, the customer was informed that gas savings would be $4,300 (more on other models) on the first page of the build, with the final price a surprise at the end. The upfront language is now altered, some would say transparent, some may say obfuscating. You be the judge. 2/
Let’s keep it simple and avoid upcharges by sticking with standard options - Pearl White paint, 18” wheels and All-Black interior. Let’s skip the $10,000 Full Self-Driving as well for now, since we’re now told "regulatory approval may take longer, in some jurisdictions." Sure. 3/ Image
Read 16 tweets
1 Jun
Ten years? Did you read the disclosure in YOUR letter stating YOUR returns begin on 6/1/11, or did you forget when you launched your first fund? You don’t appear to even have a ten-year track record, @chamath. Looks like 9 yrs 7 mos. The whole thing is confusing. Intentional? 1/ Image
Are you desperate to include Berkshire’s 48.7% decline and the S&P 500’s 26.4% drop in your “long-run” comparison? Actually, it appears that you do have a 10-year record. As of tomorrow...Of course a year-to-date presentation would have to include the losses on the four SPACs. 2/
Next, I’m very confused by your reply stating, “the discrepancy in your S&P returns vs ours is because we calculated it as an IRR based on when we made our investments.” What is “IT?” You label your returns as IRR, but are you saying you calculated index returns as an IRR? 3/
Read 8 tweets
30 May
I read your 2020 annual letter with interest, @chamath. Odd it was published in late May, but we’re all busy. Before commenting on this incredibly bad take of a comparison to Berkshire Hathaway, allow me to help you with some math. First, 1965 to 1974 is TEN years, not nine. 1/ Image
Berkshire did return 12.5% against 1.4% from 1965-1974 but that’s actually ten, not the nine years you reference. Simple mistake, I’m sure. Had you used nine years Berkshire had returned 22.7% annually, quite a bit higher than the 12.5% you errantly show. More on this soon. 2/
Second, for what its worth, the S&P 500 actually returned 18.4% in 2020, not the 17.88% you mentioned twice and were careful to point out included dividends. I’d rather round to the tenths, check my source and be correct than round to the hundredths and be precisely incorrect. 3/ Image
Read 23 tweets

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