Robinhood is still on track for a hot IPO despite the GameStop controversy

Robinhood is recovering from weeks of customer backlash, and a public grilling by Congress over the GameStop controversy. Despite that, the trading app’s user growth, brand recognition and valuation appear to be stronger than ever.

Demand for Robinhood shares in private markets is surging. The start-up likely benefitted from headlines and mentions by politicians and celebrities. Meanwhile, the app gained 3 million users last month alone, according to estimates from JMP Securities.

“From a brand recognition perspective, who doesn’t know who Robinhood is?” Greg Martin, of Rainmaker Securities, told CNBC. “Despite some positive and negative press, everyone in the world knows who Robinhood is. They couldn’t have better free advertising.”

Robinhood, the app that pioneered zero-commission trading, is still seen as the main gateway for young investors to access the markets. It is expected to go public in 2021 amid strong demand for fintech stocks such as Square, PayPal and Affirm.

Bids for pre-IPO shares of Robinhood spiked during the GameStop mania last month, according to Rainmaker, which provides financing for shares of pre-IPO companies. Demand also rose after Robinhood CEO Vlad Tenev appeared in front of Congress last week, and it’s the most bid-upon stock Rainmaker sees in the secondary market right now. The increased demand is one vote of confidence for Tenev as he navigates a public relations and regulatory crisis.

To be sure, these bids are not guaranteed. But they tend to be a good proxy for investor interest in companies at a certain price. One of the most recent bids this week was for shares of Robinhood at $52 per share — up from around $15 in September.

Private market valuations are often opaque. They are based by the value of equity someone invests as a percentage of the company and hard to calculate without knowledge of a startup’s assets and outstanding shares. But based on that step-up in bid prices, one investor told CNBC that Robinhood’s valuation could be as high as $40 billion — more than triple its last publicly disclosed number.

“With the amount of capital they now have I expect the company will be the dominant brokerage going forward and I think the market will acknowledge that,” Martin said. “The valuation could be very large in the very near future which bodes well for an IPO.”

Robinhood declined to comment on IPO timing and valuation.

The Silicon Valley start-up found itself in the middle of a firestorm last month amid the short squeeze in GameStop, which was partially driven by Reddit-obsessed retail investors. At the height of GameStop’s rise, the millennial-favored trading app restricted trading of certain securities due to increased capital requirements from Robinhood’s clearing houses.

Robinhood’s decision to restrict trading was met with outrage from traders online. Still, its private investors flocked to back the company. Some venture capitalists responsible for the $3.4 billion in emergency capital cited the app’s ability to add more customers amid the trading turmoil.

Three of Robinhood’s private investors said there was “strong demand” to get a piece of the company, even as it stared down a public relations and regulatory crisis.

The financing came in the form of convertible debt, sources said. That will convert to equity when brokerage goes public, and those investors will get a 30% discount to the market price. One venture capitalist told CNBC that he and fellow investors believed the company was going to IPO relatively soon, and the debt round was a chance to “get in at a discount.”

JMP Securities’ Devin Ryan estimates that Robinood’s total accounts are now closer to 23 million, including the 3 million gained in January and 10 million users added in 2020 as investing from home boomed during the pandemic.

In the Congressional hearing last week, Robinhood CEO Vlad Tenev said the company had delivered more than $35 billion of realized gains to investors, which implies big growth in customers and customer assets. Its average account size is about $5,000, the company said.

Tenev, who co-founded Robinhood eight years ago, answered questions from members of the House Financial Services Committee for more than five hours last Thursday. The Robinhood chief was tempered in his responses, and calmly explained the billions in cash injections were to prevent a liquidity crisis from happening.

One investor, who asked not to be named because company strategy was private, said Tenev’s testimony “went well” despite being “painful to watch at times,” due to varying degrees of understanding of Robinhood’s business model from those in Washington.

“Robinhood emerged from this — there certainly was a hit on the company but we’re fully committed to working through that.”

Another investor told CNBC that generally, Robinood backers “are feeling pretty good” about Tenev’s performance. After 48 hours of the GameStop saga, he said it was clear the Twitter backlash was “insular” as the company continued to add hundreds of thousands of new accounts that week.

“Growth has been great, despite Robinhood taking the brunt of press and questions from Congress –Vlad’s done a great job, and as good as he could have done given the situation,” he said. “He was sitting at the nexus of potentially pissing off regulators, customers and competitors.”

Some analysts expect new regulation could hinder the legal, but controversial, practice of payment for order flow, hurting the IPO’s prospects. However, Robinhood investors say its value lies in user engagement, not the revenue model. Investors pointed to its position at the top of the app store, even as it was restricting customers from trading certain stocks.

“It’s the fastest growing consumer app, and has better engagement than social media,” another investor told CNBC. “The majority of those new traders won’t be trading GameStop.”

Some critics, most notably Barstool CEO Dave Portnoy, believe Robinhood’s brand, built on democratizing investing, won’t survive the GameStop trading halts.

However, many expect retail demand for Robinhood’s offering to be strong, given its the vehicle that lets rookie investors access the stock market with little friction.

Robinhood could hit the public markets by way of a direct listing or through a special-purpose acquisition company, people familiar with the private dealings told Bloomberg News. It has also reportedly considered allowing investors on its platform to invest directly in the Robinhood IPO.

Airbnb followed a similar playbook by offering shares to their hosts, and the stock traded up on the IPO because of retail participation. Snowflake was another IPO that surged on its first day, which some speculate was due to people discounting retail thirst for the name.

With a public debut in mind, Robinhood is now talking about the future of the investing boom it helped spark. Some analysts have floated the idea of Robinhood’s ability to launch more banking products, or even mortgages on the millennial-focused app.

The future, according to Tenev, may also involve more brokerage firms merging stock trading and social media on the same platform, he told Andrew Ross Sorkin at the Dealbook DC Policy conference this week. Brokerage firms SoFi and Public already offer this feature.

As for what happened with GameStop, Tenev called it a “5-sigma” event — meaning about a 1 in 3.5 million chance of occurring. Robinhood should have enough capital now to deal with regulatory requirements associated with frenzied trading, he said.

But the GameStop volatility doesn’t seem to be going away. Investors poured back into the brick-and-mortar retailer Wednesday, sending shares up more than 100%.

— with reporting from CNBC’s Crystal Mercedes.