Deutsche Bank says sell Robinhood because meme stock phenomenon caused Street to overestimate growth

Published Fri, Nov 19 20218:27 AM EST

Black-swan market events like the GameStop trading mania created unrealistic growth expectations for brokerage Robinhood , according to Deutsche Bank. The Wall Street firm expects Robinhood's customer accounts and assets will drop again in the fourth quarter and growth will continue to slow into 2022 for the newly public stock trading app. For that reason, Robinhood is Deutsch Bank's new "sell idea." "We believe the meme stock phenomenon we witnessed en masse earlier in the year was more applicable to Robinhood's recent customer growth and likely resulted in overestimation of the company's core fundamentals and growth trajectory," wrote Brian Bedell, research analyst at Deutsche Bank. Deutsche Bank also said the security breach the company announced earlier in November may drive some customer attrition. Robinhood's performance has been lackluster since its initial public offering in July. The stock is trading around $30 per share, below its IPO price of $38 per share. "We believe HOOD's share price performance over 12 months would be primarily driven by a 'tug of war' between investors embracing the company's long-term growth potential upon product innovation and customer growth vs. investors that are concerned about nearer term challenges from expense growth creating profitability pressures, and slowing customer growth that would delay the firm's revenue and earnings growth trajectory," Bedell added. Deutsche on Friday opened a sell Catalyst Call on Robinhood, hedged against brokerage rival Charles Schwab . Deutsche Bank has a hold rating on Robinhood (over a 12-month view) and a buy rating on Schwab. "We think HOOD shares may continue to face near-term pressure, while we expect SCHW shares to continue to advance upon strong organic growth and investor sentiment for interest rates to rise," the firm said. A spike in interest rates typically bodes well for Schwab's stock. Schwab earns a spread off of the customer cash held in every account by purchasing higher yielding instruments like mortgage backed securities and making loans funded by those deposits. Schwab's stock remains highly correlated with the yield on the U.S. 10-year Treasury note. "We see SCHW as being especially well positioned to benefit from the macro environment, where we believe sentiment for [a Federal Reserve] tightening cycle is improving, (especially with inflationary pressures) that would result in higher interest rates, perhaps sooner than investors anticipate," Bedell wrote. Deutsche Bank also said Schwab's competitive position in the industry is getting stronger. Shares of Schwab are up 12% this quarter. — CNBC's Michael Bloom contributed to this report .

The logo of trading app Robinhood is displayed on a smartphone.

Olivier Douliery | AFP via Getty Images

Black-swan market events like the GameStop trading mania created unrealistic growth expectations for brokerage Robinhood, according to Deutsche Bank.