Citi Research, in a note on Monday, said it changed its rating on Robinhood Markets Inc to “Neutral with High Risk.” This change follows a dramatic 12% drop in the company’s share price last Friday, influenced by the possibility of a cut in interest rates.
Despite the recent decline in the share price, Citi believes that the risk and potential reward of an investment in Robinhood is equally balanced at the current stock valuation, indicating a cautiously positive expectation for the future of the online trading platform .
Strong growth indicators
Citi noted that Robinhood’s performance indicators showed improvement, with increases in customer deposits, margin loan balances, and options and stock trading activity.
The research firm notes that Robinhood will announce its second quarter financial results on Wednesday, August 7 and expects positive news, especially regarding its growth plans, such as entering the UK market and introducing its premium service, the Robinhood Gold subscription.
Updated financial projections
Citi revised Robinhood’s financial projections to take into account a new interest rate forecast. The Federal Reserve is now expected to cut rates by 0.50% (50 basis points) in September, with a further cut of 0.25% (25 basis points) at subsequent meetings through mid-2025, with the expected final interest rate between 3% and 3.25 %.
Because of the interest rate forecast upgrade, Citi revised its forecast for Robinhood’s net interest income, leading to a reduction in expected earnings per share (EPS) for the years 2025 and 2026 to 0 .36 and $0.42, compared to previous forecasts of $0.44 and $0.49, respectively.
Assessing value and risk
In terms of valuation, Robinhood shares trade at a multiple of 11 times expected enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization) for 2024 and 14 times for 2025. If you don’t take into account the $3 billion in cash needed for business operations, these multiples rise to 14x and 18x, respectively.
Citi has set a price target for Robinhood shares at $18, considering these valuation multiples to be fair compared to similar companies in the sector.
However, Citi maintains a cautious stance regarding certain risks. Short-term concerns center on the possibility of a drop in trading volume, while long-term questions focus on Robinhood’s ability to sustain its growth without external stimuli and capitalize on the growth resulting from recent promotional campaigns. .
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