Robinhood’s IPO presents ‘alarming’ risks for investors as regulators weigh a crackdown on the company’s main source of revenue, says a veteran stock analyst

Robinhood on cellphone
Robinhood app

  • Robinhood’s upcoming IPO is overvalued and packed with regulatory risk, according to veteran stock analyst David Trainer.
  • Trainer’s investment research firm said Robinhood’s main source of revenue-payment for order flow-could be banned by regulators.
  • A ban would severely harm Robinhood’s business model, Trainer said.
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Robinhood’s upcoming initial public offering presents “alarming” risks to investors as regulators could stifle the brokerage app’s main source of revenue, according David Trainer, CEO of investment research firm New Constructs.

81% of Robinhood’s revenue in the first quarter of 2021 came from a controversial practice known as payment for order flow. The brokerage app argues that payment for order flow allows it to offer free trading to their customers. In June, SEC chief Gary Gensler questioned whether payment for order flow provides investors with best execution.

“Payment for order flow raises a number of important questions. Do broker-dealers have inherent conflicts of interest? If so, are customers getting best execution in the context of that conflict? Are broker-dealers incentivized to encourage customers to trade more frequently than is in those customers’ best interest?” the SEC chair said in prepared remarks.

If the SEC ever outlaws payment for order flow, Robinhood may not be able to offer commission-free trading, which would put the app at a disadvantage against competitors Fidelity and Charles Schwab. Unlike Robinhood, those firms generate more revenue from other services, he added.

In June, SEC chair Gary Gensler said the US regulator is reviewing payment for order flow, but the practice is still legal. Trainer noted that Robinhood hired former SEC Commissioner Dan Gallagher as chief legal officer in 2020 and paid him $30 million after seven months.

“$30 million to one person is a lot for a firm without any regulatory concerns,” Trainer said. “The mounting regulatory risk Robinhood faces makes us concerned that the public may see Robinhood’s stated goal to ‘democratize investing’ as a ruse to lure them into speculative trading and gambling that benefits Robinhood more than the individual investor.”

Trainer also said that Robinhood’s valuation is worth no more than $9 billion, significantly less than the firm’s expected $35 billion price tag.

According to Trainer, Robinhood’s $35 billion valuation implies the firm will be able to maintain its pandemic-era profitability, grow revenue by almost 3,000%, and compete with established rivals like Schwab. But the app lacks scale and with the meme stock frenzy fading for now, its best years may already be behind it, he said.

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Didi’s IPO will not make investors any money and the business is just as unprofitable as Uber and Lyft, a veteran stock analyst says

Didi Chuxing's D1 at the launch event in Beijing on November 16, 2020
CEO of DiDi Cheng Wei at the D1 launch event in Beijing on November 16, 2020.

  • Didi’s IPO will not make investors any money, said David Trainer, CEO of investment research firm New Constructs.
  • The Chinese ride hailing app jumped as much as 28% during its public debut Wednesday afternoon.
  • Trainer, however, says the unprofitable company faces stark competition, regulatory risk, and low margins.
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Investors should steer clear of Chinese riding hailing company Didi following its IPO, a veteran stock analyst said.

The company jumped as much as 28% to $18 a share when it began trading on the New York Stock Exchange Wednesday afternoon. It priced an upsized offering of 316.8 million shares at $14, the top of its range.

To New Constructs CEO David Trainer, even the mid-range of Didi’s IPO price was too high.

“At a $65 billion valuation, we do not think investors should expect to make any money in Didi’s IPO,” he said in a recent note.

The veteran equity analyst said the company is worth no more than $37 billion, and Softbank, one of its largest backers, needs the IPO more than investors do.

Trainer’s analysis stems from the fact that at a valuation near or above $65 billion, Didi will account for 41% of the world’s ride sharing and food delivery market. He doesn’t expect the company to hit that given the vast competition for market share. Additionally, Trainer sees Didi’s business model as just as unprofitable as Uber and Lyft. Didi has an estimated 90% of market share in China, yet hasn’t generated a profit yet, and saw losses accelerate during the pandemic, he added.

“Uber and Lyft have shown investors that ride sharing is not a profitable business because of intense competition, low margins, and a lack of differentiation between services,” Trainer said.

He also doesn’t see Didi’s business model evolving as quickly as some investors forecast.

“While bulls claim that autonomous vehicles will ultimately eliminate driver costs, such a reality is years away at
best,” Trainer said. “In the meantime, Didi will continue to offer services below cost and provide driver incentives to attract drivers to the platform, even at the detriment of profitability.”

The analyst also warned that Didi is at risk of increased regulation in China. In a filing, the company outlines that its business may be subject to heightened regulatory scrutiny by the Chinese government, Trainer said.

He pointed to a Reuters report from June that the State Administration for Market Regulation (SAMR) has begun an antitrust probe into Didi Global, specifically looking at whether the firm used “competitive practices that squeezed out smaller rivals unfairly.” The SAMR also fined Didi in May for violating anti-monopoly rules.

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Compass cuts IPO price range and downsizes deal ahead of public debut

robert reffkin compass
Robert Reffkin, CEO and cofounder of Compass.

  • Compass cut its IPO price range from $23-$26 to $18-$19 and cut the number of shares for sale ahead of its public debut tomorrow.
  • The pricing suggests the SoftBank-backed residential brokerage firm will be valued at around $7 billion.
  • Stock analyst David Trainer said Compass fails to generate profits and didn’t justify its previous $10 billion valuation.
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Compass slashed its IPO price range from $23-$26 to $18-$19 and cut its initial stock offering from 36 million to 25 million shares ahead of its long-awaited public debut on Thursday, according to SEC filings.

The new pricing suggests the SoftBank-backed residential brokerage firm will be valued at around $7 billion after its IPO, a drop from the $10 billion expected from the previous stock valuation.

Compass is the latest firm to face a rocky path to its public debut. Earlier this week, Amazon-backed Deliveroo priced its shares at the bottom of its range, and then tumbled 30% during its first day of trading in London on Wednesday.

In the weeks leading up to Compass’ IPO, analysts expressed doubt about the firm’s high valuation, tech-startup claims, and path to profitability.

In an IPO research note published Monday before the news of the price cut, New Constructs chief David Trainer said Compass’s $10 billion valuation implied it would disrupt the real estate business and generate twice the revenue of the current largest US brokerage, Realogy.

He added that Compass is simply “a traditional brokerage with flashy marketing, whose only advantage is an unlimited ability to burn cash.”

“Compass fails to generate any profits, and with minimal ability to cut costs (and remain competitive), it’s hard to make a straight-faced argument that the firm can justify a ~$10 billion valuation given its ‘technological advances’ are already standard in other real estate businesses and its competition has greater scale and is much more profitable,” Trainer said.

The stock analyst credits Compass’ success to its access to large amounts of capital from SoftBank, and added that “SoftBank needs this IPO more than investors do.”

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Coinbase’s expected $100 billion valuation is ‘far too high’ given the increasing competition in the cryptocurrency market, a veteran stock analyst says

coinbase mobile phone app
In this photo illustration, Bitcoin course’s graph is seen on the Coinbase cryptocurrency exchange application on February 12, 2018 in Paris, France. Founded in June of 2012, Coinbase is a digital currency wallet and platform where merchants and consumers can transact with new digital currencies like bitcoin, ethereum, and litecoin. The company is based in San Francisco, California generated in 2017 a record turnover of one billion dollars (about 810 million euros) with exceptional trading volumes, which made it the most downloaded mobile app on iOS last December.

  • Coinbase’s rumored $100 billion valuation is “far too high,” said New Constructs CEO David Trainer.
  • The cryptocurrency exchange is set to go public via direct listing in the near future.
  • Trainer said increasing competition in the crypto exchange market will weigh on Coinbase’s lofty valuation.
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Coinbase could go public via a direct listing as early as March, but New Constructs CEO David Trainer says investors should not buy the stock if the valuation is anywhere close to current expectations.

The cryptocurrency exchange platform has a rumored valuation of roughly $100 billion, which is “far too high” given the increasing competition in the market, Trainer said in a recent note.

Although the company achieved profitability in 2020, the current expected valuation implies that Coinbase will become the largest exchange in the world by revenue, which isn’t guaranteed given the existence of competitors like Gemini, Kraken, and Binance, he added.

In 2020, transaction revenue represented over 96% of Coinbase’s net revenue, according to Coinbase filings. Trainer points out that the exchange’s transaction revenue as a percent of trading volume is 57 times higher than the Intercontinental Exchange, which runs the New York Stock Exchange.

Competitors will likely emulate Coinbase’s high margins, and the exchange’s “competitive position will inevitably deteriorate,” Trainer said.

“…if stock trading fees are any indicator for crypto trading fees, we should expect them to quickly go lower if not to zero,” said the research analyst. “Competitors such as Gemini, Bitstamp, Kraken, Binance, and others will likely offer lower or zero trading fees as a strategy to take market share, which would start the same “race to the bottom” that we saw with stock trading fees in late 2019.”

“The likelihood of Coinbase maintaining such high fees is very low in a mature market,” he added.

With an expected valuation of $100 billion, Coinbase would earn a “neutral” rating from New Constructs.

Last week, D.A. Davidson initiated coverage of Coinbase with a “buy” rating and price target of $195. However, the analysts said it’s too early to tell if Coinbase will become the “Amazon of crypto” or the failing Netscape.

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DoorDash is the ‘most ridiculous IPO of 2020’ and holds no value beyond bailing out private investors, a veteran equities analyst says

doordash dasher courier delivery 6
  • DoorDash is set to go public on Tuesday, but one stock analyst cautioned investors against buying into the food-delivery startup.
  • “We think this proposed public equity offering holds no value, $0, beyond bailing out private investors before unsuspecting public investors realize ,” David Trainer, the founder and CEO of New Constructs, said in an email.
  • Trainer said he was concerned that it took a global pandemic for the company to turn a profit.
  • Though revenue grew by 268% year-over-year in the third quarter, DoorDash might not be profitable in the future, especially after a coronavirus vaccine sends more people back to restaurants, Trainer said.
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DoorDash’s initial public offering “holds no value,” and the company may never be profitable, said David Trainer, the CEO and founder of New Constructs.

The food-delivery startup upped its IPO price range to $90 to $95 a share in a filing on Friday after initially targeting $75 to $85. The new target means DoorDash is now seeking to raise as much as $3.1 billion in its public debut on Tuesday.

It could be one of the largest US tech IPOs of the year, though Trainer branded it “the most ridiculous IPO of 2020.”

The veteran Wall Street analyst said that DoorDash’s last private valuation was only $16 billion and that its pre-IPO stage reflected the “overblown fervor of the work-from-home theme.”

“We think this proposed public equity offering holds no value, $0, beyond bailing out private investors before unsuspecting public investors realize the business is not viable in its current form,” he said in an email.

Read more: Market wizard Chris Camillo grew his trading account by $9.7 million in 2020. Here’s the simple strategy he’s using to mint millions.

Trainer added that the company would need to grow its share of the competitive global food-delivery app market to over 56% from roughly 16% over the trailing 12 months to justify its valuation.

DoorDash’s revenue grew by 268% year-over-year in the third quarter of 2020, but Trainer cautioned investors against expecting further growth, especially if a swiftly deployed coronavirus vaccine sends people back into restaurants.

“It took a global pandemic to drive the firm’s one quarter (ended June 30, 2020) of GAAP profitability. The firm has not been profitable since, and we think it may never be,” he said.

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“Investors should take DoorDash’s GAAP numbers with a grain of salt,” Trainer added. “The company disclosed a material weakness in its internal control over financial reporting in its S-1. This disclosure means DoorDash didn’t have adequate technology and processes in place to ensure the accuracy of its financial statements and increases the odds that DoorDash will need to restate its financials in the future.”

Trainer also pointed out that DoorDash publicly filed for its IPO on November 13, a few days after Pfizer announced its vaccine was found to be over 90% effective at preventing COVID-19.

“We think DoorDash’s current investors and bankers recognize that the window of opportunity to IPO this terrible business closes quickly when the threat of COVID-driven lockdowns no longer drives growth in food delivery demand,” the analyst said.

Read more: A stock chief at BlackRock, the world’s largest asset manager, talked to us about what’s next in 2021 for the biggest market winners – and explained why energy and retail are poised for a comeback

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