Robinhood entered a 'nervous market': IPO ETF Manager

Renaissance IPO ETF Manager Kathleen Smith joins Yahoo Finance Live to discuss the state of the IPO market following Robinhood’s public debut.

Video transcript

AKIKO FUJITA: Companies have come to market at a record pace so far, at least in the first half of the year. But what does the pipeline look like as we look to the second half? Let's bring in Kathleen Smith, Renaissance IPO ETF Manager. Kathleen, it's good to talk to you today. Let me just pose that same question I posed to Anthony. What do you make of Robinhood's performance on its first day yesterday? Was it about the structure, the heavy retail allocation, allowing investors to trade on the first day? What happened?

KATHLEEN SMITH: I'm sure some of it had to do with the fact that so many shares were not locked up, which enables the underwriter to really control the trading and the distribution. But I would add that Robinhood's kind of a challenging company to put a valuation on. I mean, if you look at, for example, the latest 12 months revenue and the valuation against that metric, Schwab trades at five times latest 12 months revenue. Robinhood trades close to 20 times.

And that is a big differentiating factor, even though it could make some logical sense to-- when you realize Robinhood's growing four times faster than Schwab. But that's the challenge here, is to figure out what is the appropriate valuation. And the market's going to figure that out. So I don't really-- I'm not too worried about the first day of trading and of breaking its IPO price. And I can make some comments about the overall market's getting a little bit nervous, which is probably good.

Robinhood is going to fit into the landscape of what other brokerage firms are trading for, relative to their growth. And so it'll all get figured out coming up. We are going to be including Robinhood in the Renaissance IPO ETF. We include the very large companies that go public. So in the middle of the week, we will be adding that position to our ETF. So we're looking for--

ZACK GUZMAN: Interesting, yeah.

KATHLEEN SMITH: --a reasonably priced Robinhood.

ZACK GUZMAN: Yeah, it's been an interesting time to watch all this play out, given how much money has been raised by these companies, already, you know, matching, if not surpassing, what we saw last year. And, you know, we still got a long ways to go here in 2021. But the excitement is not there. And as Akiko kind of laid out, on the retail side, it seemed like Robinhood was really hoping that this was going to go well to kind of get more of its users excited for some of that early IPO access.

And kind of, you know, on the retail side, we talked so much about that being limited in these IPOs. The day one pop basically is something we watch and report on in this show. But most average investors out there just watch and think about what could have been. I mean, what does this maybe signal about, you know, how that might not be an exciting piece to draw people in anymore if this is kind of what they got in on was an early access to declines?

KATHLEEN SMITH: Over the years, I was an investment banker years ago. And we would-- when companies got the idea that they should give shares to their customers, we would always point out that that sword can cut both ways. You know, if the IPO does well, they're happy. But IPOs don't always do well, at least initially. So an investor is so different than a customer user, even though, obviously, Robinhood customers should know something about the stock market.

My point about the market, I think, is important to note, is if you look at the number of deals that are trading above their IPO price year to date, it's less than 50%. Earlier in the year, it was around 60 plus percent. So the market is-- as Robinhood came in to pricing its IPO, the market was a little bit shaky. I mean, when you get below 50%, It's not-- you don't buy every IPO. You've got to look under the covers and say, what am I buying and at what price?

Also, this week, we saw three major IPOs postpone, taking about $2 billion of proceeds off the table. And if you haven't noticed, [INAUDIBLE], which priced last night, cut its valuation and amount of the proceeds raised by about 25%. So we're in a more nervous market. That's a good market. We'd like to see when there isn't-- aren't so many companies coming out and having big pops. As a buy and hold investor, we want to see reasonable prices. So the market is going through a little bit of a re-evaluation process right now. And Robinhood sort of ran into that when it came public yesterday.

AKIKO FUJITA: Kathleen, you've always got good intel on what's in the pipeline as we look ahead to the rest of the year. We got word today in this Reuters report the SEC is now looking to halt any reviews of Chinese companies looking to go public in the US. That pipeline was still pretty robust in the second half of the year. Have you seen a slowdown? I mean, I'm just curious to see what you've observed on the back of these constant headlines on the crackdowns, whether companies can list in the US anymore. What are you seeing from your perch?

KATHLEEN SMITH: Yes, there is that information about the SEC, but I think it's even more important to note that year to date, there have been about 33 Chinese IPOs. And on average, they're down 18%. So when I said the overall market, your average, you know, they're trading slightly below 50%. With the Chinese IPOs, only 18% are trading above their IPO price. So investors already know they're going to be pretty nervous if they even saw a Chinese IPO. So we could tell we were going to see that slowdown now the SEC sort of put a stamp on that one, saying we'll be more critical of these.

But the performance-- and so, you know, the reason is that the Chinese government has decided to assert its control more on these high growth companies that think they are above the government there and can actively make money and be maybe much more entrepreneurial than the government would like. So I think that that has-- was sort of the trigger that has stopped this.

And, you know, we are where we are. We're not going to see Chinese IPOs. We already can tell that the amount of issuance is going to slow down. We can see it in the filings. They're slowing down. So that's not a bad thing. I think investors need time to study these companies. And when you have 18 or 20 IPOs pricing in a week, I question how many companies are being studied well by investors.

AKIKO FUJITA: And Kathleen, quickly, when you say we're not going to see Chinese IPOs, are you just talking about within the quarter? Or do you think just in the near term, as these reviews happen?

KATHLEEN SMITH: It's hard to know how long. But I think it's possible that through the end of the year, we're going to see very few. I do think-- and rightly so-- that the Hong Kong market ought to take many of these companies public. And investors are global. We can buy IPOs in Hong Kong. So it might make sense. There are issues for US investors and Chinese companies. We like them, but the disclosure is not the same. The accounting oversight is not the same.

AKIKO FUJITA: Yeah, and we have seen, to your point, a lot of companies do secondary listings in Hong Kong, too, in anticipation of additional crackdowns. Kathleen, always good to talk to you. Kathleen Smith, Renaissance IPO ETF manager.