Robinhood could sink 22% this year as 'the big unlock' releases millions of shares into the market, JPMorgan says

• JPMorgan analysts said Robinhood's price may drop as millions more shares are freed up.
• The stock will "more likely to trade on fundamentals rather than sentiment," JPMorgan said.
• The analysts gave the stock a $35 price target and an underweight rating.

Robinhood stock could plunge in the coming months after millions more shares are added to the market, JPMorgan analysts led by Kenneth Worthington said in a Wednesday note.

The analysts gave the company an underweight rating with a $35 price target - roughly 22% lower than Tuesday's closing price - saying that as more shares are unlocked, retail investors will have less influence, "making the stock more likely to trade on fundamentals rather than sentiment." The "big unlock," analysts said, is Dec. 1 when more than 500 million more Robinhood shares are freed up.

Robinhood went public in July and, in a rare move, gave retail investors access to buy into the stock at the $38 IPO price. The stock is trading around $44.10 as of 12:06 p.m. ET Wednesday.

The positive sentiment around the company is already reflected in the "rich valuation," JPMorgan said, but it's unlikely to last long-term.

Robinhood has advertised itself as a brokerage with the goal to "democratize finance for all." But the focus on small accounts with limited room for profitability could limit the company's ability to be competitive, the analysts said.

Its position as a brokerage is "inferior to larger existing participants," the analysts said. While it "brings investing to those that have been underserved, we don't see a technological competitive advantage, and we see a brand and product offering that risks investors graduating to other more comprehensive financial institutions over time."

The analysts also noted in the third quarter, new downloads sunk 78% from the second quarter, according to Apptopia data. Though management warned the summer months would cause an expected slowdown, the analysts said the drop is greater than crypto and more traditional trading apps.

"Market conditions need to remain robust to buy time for Robinhood to build out the infrastructure needed to compete over time," the analysts said.

Robinhood did not immediately respond to Insider's request for comment on the note.

In an Op-Ed to the Wall Street Journal Tuesday Robinhood CEO Vlad Tenev defended the company's mission to help people build wealth.