Citi believes Robinhood (NASDAQ:HOOD) Markets' stock isn’t set for big wins this year until the zero-fee app starts showing more steady growth and consistency.
The bank is shifting to a more cautious stance on Robinhood stock while indicating a preference for LPL Financial (NASDAQ:LPLA) and Interactive Brokers (NASDAQ:IBKR).
Citi Research today released its first-quarter preview for North American brokers and asset managers. The analysis comes amid a backdrop of strong market levels and robust trading activity benefiting the sector, with particular focus on organic growth momentum as a key factor for rating.
Robinhood stock has jumped by more than 44% year-to-date, a surge attributed largely to the rising prices of Bitcoin. The analyst notes that the popular trading app is showing a 92% correlation with original cryptocurrency since the beginning of 2024.
However, with crypto accounting for 13% of Robinhood's first-quarter revenue, Citi believes the stock's valuation has become disconnected from its fundamentals. The report highlights concerns over a potential pullback in Bitcoin prices or a market downturn affecting Robinhood's stock, especially given its current valuation premium compared to Interactive Brokers.
Citi also suggests that the no-fee app faces headwinds due to a gradual decrease in retail investors' engagement with the stock market. This diminishing interest is becoming evident as the stock market experiences a prolonged period of losses and the impact of stimulus checks begins to wane.
Meanwhile, LPLA and IBKR are highlighted for their strong organic growth momentum and potential moving forward. LPLA's opportunities in the enterprise channel and its momentum in recruiting wirehouse financial advisors are particularly noted.
IBKR's standout features include its account growth rate, which accelerated to 29% annualized growth in the first quarter of 2024, and its robust trading activity and margin lending.
While the report is bullish on the growth momentum of LPLA and IBKR, it adopts a more cautious stance on Stifel Financial (NYSE:SF) and Raymond James Financial (NYSE:RJF). Citi analysis cites a wait-and-see approach due to recent stock performance and a preference for better entry points. Charles Schwab (NYSE:SCHW) is seen as having a balanced risk/reward profile due to a mixed outlook despite clearing the decks with its Q1 pre-announcement.