Citigroup Inc (NYSE:C) analyst William Katz today downgraded the rapidly growing EFT WisdomTree Investment, Inc. (NASDAQ:WETF) from Buy to Neutral in a research report sent to clients. However, Wall Street isn’t worried about the downgrade as the stock is up about 3 percent in the afternoon session.

WisdomTree Investments Logo

Upside Potential Already Discounted

William Katz said the primary reason behind the downgrade is the stock’s valuation. WisdomTree Investment, Inc. (NASDAQ:WETF)’s stock price has almost doubled this year so far. That prompted Citigroup Inc (NYSE:C) to believe that the upside is already discounted. Katz has also lowered the 12-month price target from $16 to $13.50. Citigroup remains optimistic, however, about WisdomTree Investment’s passive growth and its ability to push the stock further up.

The Citigroup Inc (NYSE:C) analyst said that his decision to lower the rating of the stock follows AUM “glide-path” and valuation analysis that indicate less upside potential that what Citigroup had earlier anticipated. Citigroup used “top down” and “bottom up” scenarios to calculate when WisdomTree Investment, Inc. (NASDAQ:WETF) can touch the $100 billion AUM target. Then the analyst estimated underlying earnings capacity, and compared the valuations to BlackRock, Inc. (NYSE:BLK)’s $800 billion iShares platform. These calculations gave less than expected ETR, leading to a downgrade.

Citigroup Inc (NYSE:C) has also lowered its 2013-2015 EPS estimate from 40 cents, 63 cents and 52 cents to 36 cents, 58 cents and 46 cents respectively. The reduced EPS estimate reflects lower flow forecasts as stock markets (especially Japanese) have fallen drastically since Citigroup’s last upgrade.

WisdomTree To Reach $100B in 2018

WisdomTree Investment, Inc. (NASDAQ:WETF) management expects that the ETF industry will drive about $1.5-$2 trillion of net inflows in the next seven years. And the company has targeted 3-5% market share. Citigroup Inc (NYSE:C) took the midpoint of 4 percent, and estimated that WisdomTree Investment will most likely touch the $100 billion target in 2018. That’s in sharp contrast with Goldman Sachs analysis, which expects the WisdomTree to reach $100 billion by 2014.

Citigroup Inc (NYSE:C) said investors currently value BlackRock, Inc. (NYSE:BLK)’s iShares ETF platform at 25x LTM adjusted EPS and about 18X forward EPS for 2014. Though iShares is well established in the international market, WisdomTree Investment, Inc. (NASDAQ:WETF) has the potential to grow faster given its current size. William Katz used 25x P/E target versus the midpoint of 2018 implied EPS (Citigroup expects WisdomTree to touch $100 billion AUM in 2018). That gives a price target of about $12, near the stock’s current level.

WisdomTree Investment, Inc. (NASDAQ:WETF) shares were up 3.58 percent to $12.44 at 1:41 PM EDT.