An uplift in retail trading volume could boost earnings over the coming quarters, says this Wall Street analyst.
Shares of Robinhood Markets (HOOD 12.23%) soared over 20% this week, according to data from S&P Global Market Intelligence. The retail brokerage that pioneered free stock trading got an analyst upgrade and saw a benefit from sentiment around the return of retail day traders. As of this writing, the fintech disruptor is up 62% year to date (YTD).
Here’s why Robinhood stock shot up higher this week.
The return of retail traders, analyst target upgrade
Today, Bank of America upgraded its price target on Robinhood from $14 to $24 a share, a huge boost for the fast-growing company. Robinhood is currently at around $20 a share. After Robinhood released its first-quarter earnings, the bank now thinks the company is getting some momentum with the potential return of retail trading activity that can drive revenue growth. It is also seeing a profit inflection with higher margins. The company is making gains from cryptocurrency trading as well.
In the first quarter, Robinhood’s revenue grew 40% year over year, and it reported positive earnings per share (EPS) of $0.18. It used to be highly unprofitable, so this is a good sign for the company whose shares are still down 70% from all-time highs. It is seeing strong growth from its premium Robinhood Gold membership, which now has 1.7 million subscribers.
This is before considering any benefit from the return of meme stock traders, which happened for at least a short period this week. If meme stocks see a prolonged resurgence, Robinhood will likely benefit financially.
Is the stock a buy at these prices?
After this stock price bump, Robinhood now has a market cap of $18 billion. Even though revenue is growing quickly, this seems like an expensive price to pay for an online brokerage of this size. The company did just $2 billion in revenue over the previous 12 months and is barely profitable. The stock has a price-to-earnings ratio (P/E) above 100.
Robinhood stock may trade higher. It has a big narrative backing it right now and is a favorite among day traders. But smart investors know it is the financial health of a company over the long term that matters, along with the price you pay for a stock. That financial health will drive long-term returns. At today’s prices, Robinhood looks wildly expensive versus its underlying financials, so it is probably best to avoid this stock for now.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.