Stock Analysis & Ideas

J.P. Morgan Sees Doom and Gloom in Robinhood Stock

Is it time to wave farewell to the meme-stock phenomenon and its attendant gains? J.P. Morgan’s Ken Worthington thinks so and this could have implications for meme-stock enabler Robinhood (HOOD).

“We think that the easy money made by leveraged-long trades in the meme-stock era is over,” said Worthington. “In the near term this could mean both slower volumes and lower margin balances hurting already negative profitability.”

Furthermore, for the last three quarters through 1Q22, investors on the platform have not only generated negative returns but have also underperformed the S&P 500 by a significant margin. Worthington thinks this presents even more of a challenge for the trading platform. “As goes the performance of Robinhood customers goes the outlook for Robinhood’s business,” says Worthington, who points out the data on Robinhood’s clientele is “not pretty.”

“While negative returns are not surprising for 1Q22 or April 2022,” notes Worthington, “the fact that Robinhood customers generated substantially negative returns in 2H21 in what were up markets and rising Bitcoin prices is surprising.”

And it looks like Q2’s data so far is even worse. The depressed market has led to a decline in volumes across the industry, with retail involvement waning as equity and retail options participation has dropped. “However,” adds Worthington, “both are above pre-Covid levels suggesting further downside should market conditions remain challenging.”

Robinhood might have set out to democratize access to financial services, but Worthington wonders whether the company can win “if its customers are losing,” as he expects to see a difference in behavior when customers lose money as opposed to generating positive returns.

“We expect negative returns and/or meaningful underperformance will hurt trading volumes, leverage, margin balances, cash levels and over time deposits and new account growth,” the analyst summed up.

In line with his bearish approach, Worthington gives Robinhood shares an Underweight (i.e. Sell) rating and his $11 price target implies shares will remain rangebound for the foreseeable future. (To watch Worthington’s track record, click here)

Robinhood elicits a wide spectrum of opinions on Wall Street; based on 5 Holds, 4 Buys and 3 Sells, the stock makes do with a Hold consensus rating. However, the average price target is more upbeat; at $13.66, investors are looking at potential one-year returns of ~36%. (See Robinhood stock forecast on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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