Robinhood Sees Surge in Trading as Bull Market Returns, Analyst Upgrades Stock

Robinhood Markets Inc HOOD shares are trading higher after B&A Securities analyst Craig Siegenthaler upgraded the stock from Underperform to Buy and raised its price target from $14 to $24.

Siegenthaler noted the current entry point as very different from 2021 when he first initiated on HOOD with an Underperform. 

Now, interest rates are elevated, and the BofA economists forecast Fed rate cuts to start in December. 

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The analyst said economic growth is surprising to the upside, and stock and crypto markets are back in bull market territory. 

Robust retail engagement will benefit HOOD on multiple fronts, including accelerating near-term organic growth, higher trading activity driving rising payment for order flow, and margin loan balances, which are the most profitable asset on HOOD’s balance sheet, he noted. 

First, HOOD was increasing, and he thought its growth would decelerate, but now he is looking for an acceleration. 

Second, the macroeconomic backdrop is more favorable, as he expected several years of improved retail engagement versus 2021 when he expected a significant decline. 

Third, HOOD is now profitable after cutting expenses much quicker than anyone expected, and these valuation metrics provide tangible support to the HOOD stock. 

In 2021, the HOOD stock was trading at 20x—50x revenues, and this valuation declined significantly to under 5x, which is why he noted that the entry point is more attractive. 

HOOD reported a record 40% adjusted EBITDA margin for the quarter, aiming for the 50% level over time as they reach economies of scale, Siegenthaler said. 

The analyst became more positive on HOOD’s ability to stay profitable going forward as they have now launched most of the standard products needed to compete with more developed peers and have reached the critical mass to withstand volatility in the market without having to rely on outsourced funding which has dried up considerably from when they went public in 2021.

The analyst is positive on HOOD’s free cash flow conversation, which compares favorably to other brokers that either operate a capital-intensive bank or are using their balance sheet to fund growth via transition assistance.

Price Action: HOOD shares traded higher by 10.1% at $19.69 at last check Friday.

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