Robinhood is one of Silicon Valley’s most valuable and fastest-growing startups. And the fintech firm that pioneered commission-free stock trading is soon selling shares of its own in an initial public offering (IPO) that could value the company as high as $40 billion. But the big question is: will it make a good investment?

Why should you invest?

Impressive growth

Founded less than a decade ago, Robinhood today boasts almost 18 million active monthly users – double its user count just a year ago. Explosive trading volumes amid the “meme stock frenzy” at the start of 2021 pushed its first-quarter revenue 300% higher than in 2020, and Robinhood’s total sales over the past four quarters surged almost fourfold to $1.3 billion.

One big reason for this growth is that Robinhood’s users are trading larger amounts and more often: revenue per user rose 65% in the first quarter of 2021 compared to a year before.

Improving profit margins

Robinhood’s strong “operating leverage” means its profit grows at a faster rate than its revenue, resulting in ever-higher profit margins. The firm’s EBITDA (earnings before interest, taxes, and various non-cash expenses) margin was 16% in 2020 – but it rose to 22% in the first quarter of 2021. (Operating leverage is a measure of how revenue growth translates into growth in operating income. It is a measure of leverage, and of how risky, or volatile, a company’s operating income is.)

You could get in at the actual IPO price

Robinhood is reserving up to 35% of its IPO shares for its customers, meaning you could potentially buy into the company at the same price as big institutional investors which normally get first dibs on new stocks.

The company’s cunning plan also creates a neat source of extra initial demand for its IPO. If this combines with a small offering size – we still don’t know exactly how many shares Robinhood will be selling – favorable supply and demand dynamics could boost the firm’s stock price shortly after it lists.

Why shouldn’t you invest?

Regulatory risk

This is perhaps the biggest danger investing in Robinhood – especially considering how hard it is to predict regulatory outcomes. There are currently at least seven ongoing investigations relating to misleading disclosures, the meme-stock frenzy, gamification of trading, and more. In fact, the firm was slapped with a record fine just last week for misleading customers and making technical oversights.

Most worrying of all is how Robinhood makes most of its money. Selling customer orders to market makers in a practice known as “payment for order flow” accounted for 75% of Robinhood’s revenue in 2020. But critics – including the US’s new stock market regulator – argue that this creates a conflict of interest: brokers are incentivized to send orders to whoever pays the most, which might not necessarily be the best deal for customers. The UK’s elimination of the practice has reportedly resulted in better prices for investors.