Why Wolfe Research is bullish on Robinhood

Robinhood Markets (HOOD) received an upgrade from Wolfe Research from Peer Perform to Outperform with a price target of $29 per share. The firm cited the company's strong fundamentals as helping it achieve growth.

Wolfe Research managing director Steven Chubak joins Market Domination to give insight into the firm's upgrade and how he believes the stock will perform moving forward.

Chubak outlines the growth levers that Wall Street is missing: "I think the most important component is actually expenses. So there is a tendency to focus on a lot of the brokerage metrics. But what's really going to drive the earnings growth from here is the fact that they have a highly leverageable expense base, where our expectation is that 90% of their expenses are fixed. They are going to see 75% incremental margins...It's that operating leverage that people are not adequately reflecting in numbers and that's really the biggest source of upside," Chubak tells Yahoo Finance.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Nicholas Jacobino

Video transcript

Wolf research upgrading Robin Hood to outperform and boosting its price target to 29 a share and joining us now is Steven Cub Back Wolf Research managing director, Steven.

It's good to see you.

So it sounds even like you hosted a dinner uh with the company's CFO you must have liked what you heard, Steven, you go to out perform on the name targets 29.

How come Steven?

Let's talk big picture.

Why do you think this, this is a name to buy here?

Yeah.

Uh Well, first of all, thanks for having me on the show.

Um Look, I I wanna give some different perspective because Robin Hood is predominantly covered by fintech analysts.

Um I'm actually a financials and banks analyst by trade, but really what's underpinning our thesis, what we're looking for is durable earnings growth upside to gap earnings.

So forget the non gap adjustments, you know, under appreciated growth levers and a reasonable valuation.

And so we came away from the dinner, you know, quite constructive just given there's a lot of growth runway ahead for this company as we started to underwrite some of the levers that they could pull on the crypto side, active trader expanding internationally.

Um Our estimates shook out 70% above the street 70.

And so it's very rare that we see that mind the gap, so to speak or that um upside relative to street numbers where a effectively the analyst community is not modeling any growth over the next two years.

So definitely a lot of room for them to surprise positives.

Yes, Steve, what do you think they're missing?

What do you think the streets not seeing when it comes to Robin Hood, New York?

What are some of those growth levers that you would zero in on?

Well, I I think the most important component is actually expenses.

So there is a tendency to focus on a lot of the brokerage metrics.

But what's really gonna drive the earnings growth from here is the fact that they have a highly leverage expense base where our expectation is that 90% of their uh expenses are fixed, they are gonna see 75% incremental margins.

So for every additional dollar of revenue, you're gonna have 75 cents of that dollar fall to the bottom line.

And it's that operating leverage that people are not adequately reflecting in numbers.

And that's really the biggest source of upside.

But even in terms of revenue momentum, they're growing organically at 20% they're growing accounts at 5% and that supports or uh 20% revenue growth roughly.

So as you start to think about that earnings growth algorithm.

They're gonna grow earnings at 30% annually and the street is not reflecting any growth over the next two years.

You know, you look though at, at this chart here, Steve and I mean, what a move already, right?

But the stocks up about 75% this year, it's up about 100 and 30% over the last 12 months.

I mean, how, how does valuation look to you at these levels?

Yeah.

No, it's a good question.

I'm glad that you asked because I think it's important to really parse what's driven some of the out performance over.

And let's just use the year to date number of 74%.

It's exclusively driven by estimate revisions.

There has been no multiple expansion for this company.

I cover 28 names.

There are only two that have actually seen multiple contraction and Robin Hood has seen no multiple expansion despite 74% gains in the stock price.

And so that's a really key differentiator.

It's all been driven by improving fundamentals.

It's not a function of a higher multiple.

And so it's a much higher quality, the um source of price strength that I don't think is adequately contemplated by most folks.

And so for us, so long as estimates continue to get revised, higher, this stock is gonna continue to rally and that's really what the data is showing us.

The stock price is 91% correlated to estimate revisions and we expect that estimates are gonna be revised 70% higher by 2026.

Um, 1 funny little part of your note, I have to say Steven was when you said what this upgrade is not, you said it's not a bullish view on crypto price appreciation re meme resurgence or anything roaring kitty.

So their growth, those estimates are not contingent on sort of these various zeitgeist things that, that come into the market.

That that's exactly right.

Um For us, it was really important that we could identify drivers that are durable and sustainable to drive that growth.

The fact that there's gonna be an occasional meme frenzy frenzy or we're gonna go through a crypto winter.

We're really trying to normalize for all those factors.

So normalizing for activity rates, normalizing for account growth, normalizing for organic growth.

What does that mean in terms of earnings growth potential?

And again, it, it supports an algorithm that leaves our estimate 70% higher than where consensus is today.

And so long as those estimates get revised higher, again, this stock is gonna continue to outperform.

There's been a lot of noise on the regulatory front.

There's been a lot of noise on the, you know, the retail fraud with uh uh you know, Wall Street bets and the like and roaring kitty.

That's all noise to us that did not factor into our thinking at all here, Steven.

Thanks so much interesting stuff.

Good to get your insight.