Why Did Robinhood Markets Stock Drop Today?
Key Points
Cantor Fitzgerald analyst Ramsey El-Assal reiterated a buy rating on Robinhood stock today.
Cantor believes Robinhood's prediction markets business makes the stock worth twice what it costs.
Robinhood Markets (NASDAQ: HOOD) stock slipped 3.3% through 10 a.m. ET Tuesday -- and here's the thing: The biggest news about Robinhood today is good news.
As StreetInsider.com reports, analyst Ramsey El-Assal at investment banker Cantor Fitzgerald just reiterated his "overweight" rating on Robinhood stock, insisting the $110 stock is worth nearly twice its price: $212 per share.
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Why Cantor Fitzgerald loves Robinhood stock
El-Assal bases this assessment on Robinhood's entry into prediction markets, which are marketplaces where traders can buy and sell contracts tied to the outcomes of future events. Robinhood, says the analyst, is in the best position to benefit as prediction markets evolve from a place where individuals generally buy such trades to one where institutions dominate such trades.
He bases this conclusion on the company's partnership with Susquehanna International in the regulated financial prediction market exchange "Rothera," which he believes could boost Robinhood's annual revenue and earnings by about 2%.
What this might mean for Robinhood stock
If you ask me, though, a couple of percentage points improvement probably isn't enough to turn Robinhood stock into a "buy." Yes, added to the 18.6% annual earnings growth rate that most analysts already forecast for Robinhood, it would boost the company's growth rate past 20%. That still leaves the stock looking pretty richly valued at 49 times trailing earnings, however.
When you further consider that Robinhood's earnings quality is low, with free cash flow of $219 million representing barely 10% of reported net income, I'm even less enthused about the stock.
My prediction: Despite Cantor Fitzgerald's endorsement, Robinhood stock is overvalued and will decline further.
Rich Smith 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.