Alpha's Strong Performance Will Catalyze Market Share Gains In 2025

Key Takeaways

• Strategic investments and strong growth in State Street Alpha drive future revenue and earnings growth through market share gains and client acquisition.
  
• Capital efficiency and operational enhancements, such as automation, boost shareholder value and optimize net margins through productivity savings.
  
• State Street faces challenges from pricing pressures in its custody business, client attrition, market volatility, and maintaining capital management amidst fluctuating balance sheet metrics.

Catalysts

Through its subsidiaries, provides a range of financial products and services to institutional investors worldwide.

• State Street's successful execution of strategic investments and improved sales performance in 2024 is expected to drive future fee revenue growth in 2025 and beyond. This is likely to positively impact revenue and earnings growth.
  
• The strong growth in State Street Alpha, which contributed to approximately 50% of new AUC/A wins in 2024, is a catalyst for continued market share gains and client acquisition, which should benefit revenue and net margins.
  
• The expansion of product and distribution capabilities in the Global Advisors' investment management franchise, including record ETF inflows and strategic partnerships, positions State Street for continued organic AUM growth and increased management fees, positively impacting revenues and earnings.
  
• State Street's focus on capital efficiency, including returning 80% of earnings to shareholders and ensuring recurring productivity savings, demonstrates a commitment to enhancing shareholder value and optimizing net margins.
  
• Operational simplifications, automation, and technology modernization leading to approximately $500 million in productivity savings align with efforts to improve operational efficiencies, supporting positive fee and total operating leverage and impacting net margins.

State Street Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming State Street's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.2% today to 22.0% in 3 years time.
• Analysts expect earnings to reach $3.2 billion (and earnings per share of $11.93) by about January 2028, up from $2.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.6x on those 2028 earnings, down from 11.7x today. This future PE is lower than the current PE for the US Capital Markets industry at 23.1x.
• Analysts expect the number of shares outstanding to decline by 2.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.12%, as per the Simply Wall St company report.

State Street Future Earnings Per Share Growth

Risks

• State Street's financials may face pressure from headwinds related to pricing challenges, particularly in its core custody and servicing business, which could negatively impact revenue growth and net margins.
  
• The company's fee revenue growth is subject to factors such as client retention and attrition rates, with revenue retention targeted at around 97% and fee compression at approximately 2%, which could constrain overall revenue improvement.
  
• The financial outlook for 2025 assumes global equity markets will rise and NII will remain flat, but adverse market conditions or a decline in NII could adversely impact expected earnings and revenue.
  
• A special mention of previously disclosed client transitions, which are expected to be a headwind on servicing fee revenue in 2025, indicates potential risks to revenue growth and earnings from client attrition.
  
• State Street’s capital management strategy, including an 80% payout target to shareholders, could be challenged by fluctuations in its balance sheet metrics, such as Tier 1 leverage, potentially affecting financial stability and shareholder returns.

Valuation

• The analysts have a consensus price target of $109.75 for State Street based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $138.0, and the most bearish reporting a price target of just $84.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $14.4 billion, earnings will come to $3.2 billion, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 8.1%.
• Given the current share price of $100.4, the analyst's price target of $109.75 is 8.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.