Robinhood downgraded to 'sell' by Goldman Sachs as retail investors become less engaged with the stock market

• Robinhood stock fell 5% on Friday after Goldman Sachs downgraded the brokerage company to "sell."
• Goldman said Robinhood could see its business decline as retail investors become less engaged with the stock market.
• "As the benefits of stimulus wane … we believe HOOD could continue to see higher levels of churn," Goldman said.

Robinhood stock fell 5% on Friday after the brokerage company was downgraded to "sell" from "neutral" by Goldman Sachs.

The bank believes Robinhood faces headwinds as retail investors slowly become less engaged with the stock market. That decline in engagement is already showing signs of happening as stocks enter an extended-period of losses and as the effects of stimulus checks fade. 

"As the benefits of stimulus wane and the impacts of higher gas prices and inflation work through the economy, we believe HOOD could continue to see higher levels of churn as these investors leverage their smaller dollar account sizes for everyday spend," Goldman said.

The bank doesn't see Robinhood reaching profitability in 2023 given its recent growth trends, as new account openings slow down. And of Robinhood's current accounts, they usually skew towards smaller investors who are just getting started, with its average account size hovering around $4,000. That pales in comparison to other brokerage firms like Charles Schwab and Interactive Brokers, which both have average account sizes in the hundreds of thousands of dollars.

And Robinhood has little valuation support given its lack of profitability and slowing growth, Goldman said. Robinhood has a market capitalization of about $11 billion.

"The lack of a clear path towards profitability in an environment that is increasingly skeptical of valuing unprofitable fintech on a revenue multiple basis limits the path for a near term re-rating," Goldman said.

But Robinhood could still surprise to the upside if it communicates a clear path towards consistent profits, shows potential for traction from its customer base on any new product announcements, and lowers churn levels enough to support higher user growth.

One product Robinhood is starting to roll out is a crypto wallet. Almost 2 million customers on Robinhood's WenWallets waitlist will be able to send and receive cryptocurrencies as well as buy non-fungible tokens (NFTs).

But for now, that's not enough to win over Goldman. The bank set a price target of $13 for Robinhood stock, representing potential upside of about 13% from current levels.