Why Wall Street Expects Robinhood to Be Acquired

Robinhood Markets
,

which revolutionized the online brokerage industry, could be in play now that interest from cryptocurrency exchange FTX was made public. This is could spur other potential bidders for Robinhood in what could be one of the year’s most anticipated transactions.

Sam Bankman-Fried, founder and CEO of FTX, said Monday that he was excited about Robinhood’s (ticker: HOOD) business prospects. He then appeared to squelch any thought of a Robinhood-FTX merger when he said that his crypto exchange wasn’t in talks to buy Robinhood. In May, Bankman-Fried revealed he had acquired a 7.6% stake in Robinhood.

Bankman-Fried’s comment came after Bloomberg reported Monday that FTX was deliberating internally on how it could acquire

Robinhood
.

The online broker isn’t believed to have received an offer from FTX.

News of FTX’s interest caused Robinhood’s shares to pop 5% Monday. But on Tuesday the stock dropped by about 3%, closing at $ 8.86.

Now that FTX’s interest is public, this could motivate other possible bidders to make a play for Robinhood, an industry analyst said. Potential parties could include investment bank

JPMorgan Chase

(JPM) as well as rival brokers like

Charles Schwab

(SCHW) or

Interactive Brokers Group

(IBKR), which have lost market share to Robinhood.

Morgan Stanley

(MS) likely would not be interested because it acquired E*Trade in 2020 in a deal valued at about $ 13 billion. Schwab, meanwhile, scooped up TD Ameritrade Holding in a $ 22 billion transaction that year.

JPMorgan declined to comment, while a Schwab spokeswoman said it was the company’s policy “not to comment on market rumors or speculation.” Interactive Brokers didn’t immediately return requests for comment.

Founded in 2013, Robinhood disrupted the online broker space when it began offering zero commissions on stock trades that year. All of its rivals, including Schwab, ended up following the trend. But Robinhood’s customer base is its primary attraction. The online broker has a strong following among millennials and Gen Z users, with about 57%, or 13 million, of its customers falling into those demographics, according to a Morgan Stanley report from March.

A possible buyer likely would want to use Robinhood as a funnel to gain access to this prized market, an industry source said. Any bid for Robinhood would need to include a premium, bringing the range for a possible bid between $ 12 and $ 15 a share, the person said.

With 871.8 million shares outstanding, this would value Robinhood at about $ 10.5 billion to $ 13 billion. The online broker doesn’t have outstanding debt, though it did have about $ 11.6 billion in total current liabilities as of March 31, according to its first-quarter results.

Robinhood declined to comment.

Discussion of a possible sale comes less than a year since Robinhood’s much-anticipated initial public offering. The online broker listed its stock in July 2021 at $ 38 a share that set the stage for other fintechs to go public. Robinhood, like nearly 90% of the IPOs from 2021, hasn’t traded well. Its stock has remained below its offer price since October.

Robinhood, like many fintechs this year, also has announced layoffs. The company had 3,800 employees earlier in 2022. In April, the broker said it plans to cut 9% of its full-time staff.

Michael Cyprys, a

Morgan Stanley

analyst, said in a note that the market may begin pricing in some degree of strategic value. He sees a wide valuation range for a possible buy of Robinhood between $ 4.3 billion, or $ 5 a share, up to $ 47 billion, or $ 54 a share. However, this valuation is based on prior transactions involving highly profitable companies, and Robinhood, which isn’t profitable, would be less likely to attract a bid at the high end of the range. Cyprys has a $ 14 price target and an Equal Weight rating on the stock.

One issue with any potential sale is Robinhood’s two co-founders-CEO Vladimir Tenev and Chief Creative Officer Baiju Bhatt. The two collectively own all 128 million of Robinhood’s outstanding Class B shares, representing 63.5% of voting power, said Devin Ryan, an analyst at JMP Securities, in a note. (Class B stock is entitled to 10 votes per share, compared with 1 vote per share for Class A shares). Tenev has 26% of total voting power at Robinhood, while Bhatt has 39%, said Richard Repetto, an analyst at Piper Sandler, in a separate note.

“So making any deal work would require winning over HOOD’s founders,” said Repetto, who has an $ 11 price target on the stock and a Neutral rating.

JMP’s Ryan said he wasn’t surprised by the exploratory interest in Robinhood, given the share-price drop. Market sentiment around fintech more broadly also has soured, Ryan said. “We believe the Robinhood platform remains in a strong position,” he said.

Robinhood’s management views its current share price as temporarily impaired, Ryan said. Any potential acquirer “would likely need to pay a substantial premium to the current price,” he said.

Robinhood doesn’t need to sell. The online trader has about $ 6 billion of cash on its balance sheet and just under $ 3 billion in lines of credit, according to Dan Dolev, a Mizuho senior fintech and payments analyst. This means that Robinhood has about $ 9 billion in liquidity. Morgan Stanley’s Cyprys said Robinhood has less than $ 7 a share of corporate cash after it excludes cash needed to run its business.

“Robinhood is far from a position of desperation and we believe has ample cash to ride out an extended bumpy period (much more than most),” said JMP’s Ryan, who has a $ 36 price target and a Market Outperform rating on the stock.

Others still see logic to a possible tie-up between Robinhood and FTX, which has been on an M&A spree lately. An alliance or merger could bring together two companies with complementary business models, Piper Sandler’s Repetto said.

FTX could still be exploring ways to finance an acquisition or merger with Robinhood, even though there are no active M&A discussions between the two companies, Repetto said.

Write to Luisa Beltran at luisa.beltran@dowjones.com

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