A Tale of two IPOs
A paradox of listing - Robinhood and Zomato
I did not make my fortune on the cutting age of technology. I damn near lost all my money in an early investment in a instrument company. Magnetic tape came along and we didn't plan for that. Technology is a killer as well an an opportunity. Charlie Munger
Indeed, Tech is a game-changer and two recent unicorns which went public recently has their ramifications from a investor ecosystem perspective :
Democratizing finance for all.
This has been the tagline for Robinhood and they did get a taste of financial democracy last week! $HOOD got off to a rather disappointing debut for an IPO of its size. They closed the listing day with a discount of 8.4% from its IPO price of $38 ($33.35 was the day's low!) They disrupted the zero-commission platform market big time but have problematic aspects of gamification of investing which needs to be addressed in the long run ( as we all know fin-tech is one of the highest regulated markets and prone for litigation!)
Also, we need to mindful that Robinhood is not a discount broker like our home gown Zerodha. The Indian broker earns revenues by charging an extremely low percentage from the traders as brokerage. In fact Zerodha has “nudge” feature to warn against over-trading. Robinhood does not charge the traders on its platform. It earns through the Pay for Order Flow (PFOF) mechanism. The platform routes the orders to market makers who compensate the broker. Its anybody guess as on reasons for meme stocks like GME and AMC to stocks rally!
On the other hand, Zomato, the India’s first internet unicorn to tap IPO route surged a handsome 66% on its debut! Both per se are not comparable as one is a Food-Tech company and the other a FinTech company. That said there are some common themes like Valuation disparity and participation of young investors.
The Age Factor
As Social and Finance are converging, we are seeing a new age of ownership. Consumers, especially Gen Z and millennials want to be investors of companies they use. The median age of a Robinhood user is 31. ‘Their serious money is not with Robinhood,
If Robinhood wants to remain the permanent place where they go for their investments, they’ll need to build out their services.
New age investors prefer Active investing coupled with Social, which at times can be recipe for disaster. Gamification of trading has its drawbacks and a layer of content on support in terms behavioral aspects nudges for not overtrading may be needed ) Robinhood need to evolve as a full stack player catering to all age groups to remain competitive ( as more discerning investors leverage other established platforms)
A similar thing played out on Zomato IPO as well Young investors drove the demand on Zomato IPO. However, retail investor appetite was quite high! Similarly Zomato also need to pivot into a full stack player to cater to all age groups to remain competitive.
Valuation Factor
In a rare move, Robinhood offered about a third of its shares to its own users. Usually, companies do not offer shares to regular investors directly. Instead, someone who wants to buy a company’s stock on IPO day simply gets it on the public markets as you would any stock. Robinhood sold ~52.5M shares in its IPO at $38/share raising $2B, of which ~20% was sold to retail investors. Puts Robinhood’s valuation at ~$32B which is ~14X 2021 estimated revenue. Its valuation was bit stretched.
In terms of Zomato’s valuation was also stretched but a mere 10% was allocated for retail investors. Prof Aswath Damodaran from NYU Stern, has done a extensive valuation summary with DoorDash and also factoring India market nuances. Zomato is a money-losing, cash burning enterprise now, but it has immense market potential and is on track to delivering on a viable business model
The Gen Z/millennial foodie and investors are definitely looking forward for more disruption and value proposition . We need to keep tracking on how these new Tech public companies can align to Social+Finance requirements of the ever changing generation!