After IPO, Wall Street weighs in on Robinhood: ‘It’s going to be a roller-coaster ride for that stock’

Originally expected to be one of the hottest IPOs of 2021, the California brokerage’s long-awaited debut figured to stand out in a market where companies have raced to go public any way they can as investors have gobbled up shares of new stocks. So much so that Robinhood even set aside up to 35% of the 55 million shares it was offering to its first sale to its customers, though how much they ended up buying is unclear.

And yet, Robinhood’s IPO failed to live up to expectations—a sign to some on Wall Street that investors may have been uneasy about the company’s path toward becoming a financial superpower. “It’s obviously been a very wild year or so for the company,” Renaissance Capital vice president Nick Einhorn told Fortune. “And I think there’s a lot of uncertainty about the future of [Robinhood] from a lot of different perspectives.”

Shares in Robinhood, listed on Nasdaq under the ticker “HOOD,” were priced at the low end of the target range the night before the offering in a move that in theory should have set the stock up to pop in its debut. On Thursday, though, the stock was flat at $38 a share when it opened for trading. And then, the selloff began. The price quickly dropped more than 10% in the first 30 minutes. And while Robinhood shares did pare some of the losses, the stock still ended the day down 8.37% at $34.82. Premarket trading in Robinhood’s stock Friday showed additional losses of more than 1% could be on the table.

It’s not unusual for a newly public stock to struggle on its first day. In fact, about a quarter of operating companies completing IPOs this year have fallen from their offer prices on day one of trading, according to University of Florida finance professor Jay Ritter. And in many cases, such as for Facebook and Moderna, companies whose stocks do struggle early on can bounce back with ease. But Robinhood finds itself in the awkward position of having potentially become a warning sign of its own push to open up IPOs to anyone, as its IPO Access product had been marketed as a way to get retail investors in on the first-day “pops” most stocks see. Whether the company’s stock ends up ballooning like Facebook or stagnating like Vonage, which went public in 2006 with a heavy retail investor allocation, is of course an unknown for those investors who did buy in.

Not that executives pay attention to daily price movements, or so they say: “A lot of people have given me the advice, not just today but over the past few months, that we’re building a long-term business, so you have to ignore these short-term fluctuations,” Robinhood CEO Vlad Tenev said on CNBC on July 29, later in the day. “Some days, the stock is up. Some days, the stock is down.”

Founded in 2013 by Tenev and Baiju Bhatt, Robinhood was started with a goal of democratizing finance by way of a pioneering zero-commission stock-trading app for younger people. And it worked. Robinhood has helped usher in a new era for retail investing where features like zero commissions, fractional shares, and IPO investing are now commonplace. Even Thomas Peterffy, the founder of Interactive Brokers, told Fortune that Robinhood has done a “terrific job” in being a “gateway for people to come into the marketplace.”

The brokerage has seen stunning levels of growth that have only accelerated throughout the pandemic with a revival of interest in financial markets. Net funded accounts, for example, have grown from 11.7 million at the end of 2020 to an estimated 22.5 million halfway through this year, putting it not too far behind industry stalwart Charles Schwab. Its assets are a mere fraction compared to Schwab’s, though.

Questions over how long Robinhood can continue to grow at this rate seem to be one of the driving forces behind the stock’s disappointing debut. With equity, option, and crypto trading volumes waning, the brokerage has already warned that it stands to see a slowdown in transactional revenues in the coming months. Transaction rebates and payment for order flow, the controversial practice where brokerages off-load client orders to speedy Wall Street traders for execution in return for a small fee, represented 81% of Robinhood’s revenues in the first quarter, meaning its stock will likely carry a strong correlation to market activity until the company diversifies its business.

“The public markets don’t like volatility, they like predictability,” Rainmaker Securities managing director Greg Martin told Fortune. “So it’s going to be a roller-coaster ride for that stock.”

Robinhood’s IPO caps off what has been at times a tumultuous year for the brokerage, even as it has continually grown. Payment for order flow has come under a close eye at the U.S. Securities and Exchange Commission, and chair Gary Gensler has been an outspoken skeptic of the practice. The brokerage has paid out millions in settlements and fines to regulators over prior business practices such as not disclosing how it was making money and not adequately determining whether investors should be trading options. And earlier in 2021, Robinhood found itself the subject of Internet vitriol, bipartisan congressional attention, and conspiracy theories over its role in the GameStop debacle.

How Robinhood diversifies its business remains to be seen. The brokerage has made it clear that it plans to continue to roll out new features for its growing customer base, including spare-change investing and possibly retirement accounts. Christian Bolu, an analyst with Autonomous Research, said the company’s prospects reach far beyond investing into other corners of finance like lending, payments, and advisory services. In total, Robinhood is operating in market that Bolu recently estimated in a report carries a roughly $120 billion revenue opportunity, presenting the brokerage with a “significant runway for growth” that would put it in line to directly compete with the likes of everyone from Coinbase to Schwab to PayPal.

“It’s an interesting company,” Bolu said in an interview with Fortune. “They’re really attacking a large segment. It’s most of the U.S. population, frankly.”