Morgan Stanley increased its earnings per share forecasts for Robinhood over the next three years.
Prediction markets, increased trading activity and growing assets led one Wall Street bank to boost its rating on Robinhood Markets even as cryptocurrency volumes decline.
Morgan Stanley upgraded its stock rating for the online trading platform provider from equal-weight to overweight, increasing its price target from $124 to $150.
According to FactSet, the average target price is nearly $126.
Robinhood's stock (HOOD) climbed 2% to $106 in premarket trading on Tuesday, with shares down 7% overall since the start of the year.
"We see increasing evidence that broader product capabilities are improving the economics of HOOD's installed customer base supporting more assets per customer, more activity per customer and greater economics captured per activity," analysts led by Michael J. Cyprus, wrote in a note Tuesday.
Earnings per share were also raised for the next three years by 12%, 14% and 15%, respectively.
The analysts listed three key reasons for the raise, which implies an increase of 43% for the stock based on Monday's closing price.
Firstly, they wrote that the 13-year-old company's growing product range will likely lead to customers holding more assets on the platform as it expands its offerings of retirement, credit card, advisory, banking, gold and trust options.
The analysts also noted higher customer engagement as active traders continue to use its services at a higher rate since new functions like short selling, futures and desktop view have been added in the past few years.
They added that prediction markets have presented another significant opportunity for engagement. Robinhood's event contract revenue rose from $10 million to $156 million year-on-year in the second quarter, surpassing revenue from equities and cryptocurrencies.
Finally, they see opportunities for monetization increasing as the company moves deeper into market infrastructure. For example, while the company previously used third-party exchanges for its prediction-market tools, Robinhood now gets to exercise greater control and benefit more from the value chain through its affiliate exchange, Rothera, which it started to route event contracts through in June.
"Notably, our revisions come despite lower crypto forecasts, with upside increasingly driven by active trader activity, prediction markets and asset-based revenues," the analysts wrote.
-Nora Redmond
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