After Earnings, Is Schwab Stock a Buy, a Sell, or Fairly Valued?

Charles Schwab released its second-quarter earnings report on July 18. Here’s Morningstar’s take on Schwab’s earnings and stock.

Key Morningstar Metrics for Charles Schwab

• Fair Value Estimate: $105.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Charles Schwab’s Q2 Earnings

• The company overdelivered across the board. Strong client inflows attested to the draw of Schwab’s swelling trading, banking, wealth management, and registered investment advisor custody platform, while expense discipline drove an outstanding 910-basis-point improvement in adjusted operating margin to 50.1%. We expect the firm to defend those gains moving forward.
• Schwab has increased organic net new assets in its mainstay wealth management business by $218 billion year to date, a 39% improvement from the year-ago period. Roughly 37% of those fed into Schwab’s managed investing solutions, which now represent 35%-40% of asset management segment revenue.
• The company’s scalable, low-cost platform—the basis of our wide economic moat rating—allows for extremely high incremental margins. Management expects just 4.75%-5.25% expense growth for 2025, despite raising its guidance for sales growth to 18.5%-19.5%.

Fair Value Estimate for Charles Schwab

With its 3-star rating, we believe Schwab’s stock is fairly valued compared with our long-term fair value estimate of $105. With a scalable operating model that sees limited incremental costs, we expect the firm to maintain its gains through the outyears of our forecast, which now calls for average GAAP operating margins of 51.5% over the decade to come, up from 47%. Some 260 basis points of expansion are anticipated in 2025 alone, with the firm increasing its full-year revenue guidance to 19% at the midpoint but expecting non-interest expense growth of just 4.75%-5.25%.

Our revised fair value estimate corresponds to a price/earnings ratio of 22.8 times and price/book ratio of 5.0 times. The key drivers of Schwab’s valuation are its net interest margin, balance sheet growth, growth in assets under management, asset management take rate, and pre-tax operating margin.

Read more about Charles Schwab’s fair value estimate.

Economic Moat Rating

We believe Schwab has a wide moat, rooted in a durable cost advantage that we expect to persist for at least the next two decades. Our view is corroborated by an average annual return on tangible equity of 19% over the past decade, comfortably exceeding the firm’s 9% cost of equity. With $10.1 trillion in client assets at the end of 2024 representing 13%-14% market share of an estimated $75 trillion addressable market in the United States, the firm is one of a handful of financial services operators that we expect to emerge as long-term winners in an industry that continues to consolidate amid fee compression and customer expectations for higher service levels at a lower cost.

Schwab’s status as a premier asset gatherer, its ability to fractionalize investments in customer acquisition and platform services across a massive asset base, and its synergies across its retail brokerage and banking businesses have resulted in industry-leading expense ratios and swelling pre-tax operating margins, even as the firm passes through a good chunk of those savings to its customers. With the firm enjoying a strong position in the two fastest-growing markets in financial services—registered investment advisors and retail investors—we expect it to generate economic profits for the foreseeable future.

Read more about Charles Schwab’s economic moat.

Financial Strength

We view Schwab’s financial position as strong. The firm is well-capitalized, targeting a Tier 1 leverage ratio of 6.75%-7.00%, comfortably ahead of the 5.00% threshold for well-capitalized banks and the minimum 4.00% regulatory requirement. Near-term debt maturities at the corporate level are modest and should be comfortably serviceable with cash flow from operations. Further, the firm maintains access to a handful of liquidity backstops, including a $5 billion commercial paper authorization, Federal Home Loan Bank borrowing capacity, repurchase agreements, credit lines with third-party banks, a standing shelf registration with the US Securities and Exchange Commission, and access to the Federal Reserve borrowing window.

Read more about Charles Schwab’s financial strength.

Risk and Uncertainty

We assign Schwab a High Uncertainty Rating, reflecting both our quantitative model and our qualitative assessment of the firm’s risk profile. In our view, Schwab’s principal risk exposure stems from interest rate sensitivity, with secondary exposure to customer cash sorting, customer trading activity, and equity market levels.

Consistent with many financial services firms, Schwab is sensitive to interest rate risk, with a 25-basis-point federal-funds rate cut corresponding to a $350 million-$450 million reduction to net interest revenue, or roughly 4%-5% of 2024 net interest income. As a historically asset-sensitive institution, Schwab faces falling loan yields when interest rates decline. The firm has significant exposure to mortgage-backed securities prepayment risk, driving faster repricing at lower interest rates than portfolio duration would suggest during periods of declining rates.

Read more about Charles Schwab’s risk and uncertainty.

SCHW Bulls Say

• Schwab could continue to drive organic asset growth with expansion into alternative investments, expansion of lending products, and similar platform investments over time.
• Stronger-than-expected growth in Schwab’s managed investments portfolio could more than offset fee rate declines in managed products and a mix shift away from (more profitable) OneSource assets under management.
• Increases in retail trading activity could prove structural rather than cyclical, allowing the more profitable half of Schwab’s business to outgrow its RIA segment

SCHW Bears Say

• A return to a zero-interest-rate policy would pose a material headwind for Schwab’s net interest margin and revenue growth prospects.
• Regulatory changes could meaningfully affect Schwab’s business model. Any that target the firm’s cash sweep model would be particularly painful.
• The firm could struggle to expand its profitable loan book in line with its balance sheet, resulting in a higher mix of mortgage-backed securities or third-party deposit sweeps.

This article was compiled by James Ubi.