Citi Research in a note dated Monday said it has upgraded Robinhood Markets Inc (NASDAQ:HOOD) to a "Neutral/High Risk" rating. This comes after a significant 12% decline in the stock's price last Friday, due to potential impacts from lower interest rates.
Despite the dip, Citi sees a balanced risk/reward profile at current valuations, suggesting a cautiously optimistic outlook for the online brokerage firm.
Positive fundamentals
Citi notes that Robinhood’s fundamental story has been improving, characterized by healthy growth in deposits, margin balances, and options/equities trading.
The brokerage mentions that Robinhood is set to report its Q2 earnings on Wednesday, August 7th, where positive updates are expected, particularly regarding growth initiatives like UK expansion and the Gold card.
Revised estimates
Citi has updated its financial estimates for Robinhood to reflect a revised outlook on interest rates. They now predict 50 basis points (bps) of Federal Reserve cuts in September, followed by additional 25bps cuts at subsequent meetings until mid-2025, culminating in a terminal rate of 3-3.25%.
This new rate outlook presents a headwind for Robinhood’s net interest income (NII), prompting Citi to lower its earnings per share (EPS) estimates for 2025 and 2026 to $0.36 and $0.42, respectively, from previous estimates of $0.44 and $0.49.
Valuation and risk assessment
From a valuation perspective, Robinhood is trading at an enterprise value-to-EBITDA ratio of 11x for 2024 and 14x for 2025. Excluding the $3 billion in cash necessary for operations, these multiples increase to 14x and 18x, respectively.
Citi's price target (PT) for Robinhood is set at $18, reflecting these valuation levels as reasonable compared to peers.
However, Citi remains cautious about certain risks. Near-term concerns include a potential slowdown in trading activity, while longer-term uncertainties revolve around the sustainability of organic growth and the effectiveness of monetizing growth achieved through recent incentive programs.