Younger Clients And Digital Engagement Will Drive A Stronger Future For This Brokerage

Catalysts

About Charles Schwab

Charles Schwab is a large US financial services firm that provides brokerage, wealth management, banking and trading solutions to individual investors and independent advisers.

What are the underlying business or industry changes driving this perspective?

• Growing engagement from younger investors, with roughly one third of new retail households and one third of recent financial planners under 40, supports a longer client lifetime and broader use of wealth, trading and banking products. This can benefit revenue and earnings over time.
• Record usage of digital channels, with over 500 million quarterly logins for three straight quarters and rising research content interactions, suggests clients are consolidating more of their activity on Schwab’s platforms. This can support higher transaction revenue and better operating leverage.
• Strength in the RIA custody business, including 16,000 firms on the platform, the addition of services beyond custody and successful large adviser transitions, points to durable fee streams and potential improvement in asset management and administration fee revenue and pretax margins.
• Expansion of lending solutions such as pledged asset lines and margin loans, which are currently used by a relatively small portion of the asset base, creates room for further penetration that can lift net interest revenue and support adjusted pretax profit margins.
• Planned launch of spot crypto trading, combined with an existing position in crypto ETPs and strong interest in digital assets content, can attract additional client assets onto the Schwab platform and increase trading and fee revenue while spreading fixed costs over a larger earnings base.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Charles Schwab compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Charles Schwab's revenue will grow by 12.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 37.4% today to 39.5% in 3 years time.
• The bullish analysts expect earnings to reach $14.7 billion (and earnings per share of $9.43) by about July 2029, up from $9.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 18.7x on those 2029 earnings, up from 17.9x today. This future PE is lower than the current PE for the US Capital Markets industry at 39.7x.
• The bullish analysts expect the number of shares outstanding to decline by 4.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.21%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Client activity and asset gathering currently benefit from record equity markets, strong sentiment and high trading volumes. A prolonged period of weaker markets or lower engagement could compress trading revenue, reduce net new assets and weigh on earnings growth.
• The business is leaning more into balance sheet driven income, including pledged asset lines, margin loans, bank lending and reinvestment of securities. A lower rate environment or weaker loan demand over time could reduce net interest margin, net interest revenue and overall profitability.
• The plan to launch spot crypto and build blockchain related capabilities requires new technology, controls and risk management. Any regulatory setback, operational issue or weaker than expected client uptake could limit fee and trading revenue while still adding to expenses and pressuring net margins.
• Ongoing efforts to integrate and deepen relationships with legacy Ameritrade clients and to expand services for RIAs, traders and younger investors increase complexity and cost. If client satisfaction or organic growth among these groups stalls, the additional spending may not be fully offset by revenue, which could strain operating leverage and pretax margins.
• Use of AI tools, process automation and a growing product set is intended to create scale and efficiency. If technology investments do not translate into sustained cost savings or if they require ongoing high spend to maintain, operating expenses could rise faster than revenue and limit future earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Charles Schwab is $144.0, which represents up to two standard deviations above the consensus price target of $122.26. This valuation is based on what can be assumed as the expectations of Charles Schwab's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $144.0, and the most bearish reporting a price target of just $86.0.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $37.3 billion, earnings will come to $14.7 billion, and it would be trading on a PE ratio of 18.7x, assuming you use a discount rate of 8.2%.
• Given the current share price of $99.96, the analyst price target of $144.0 is 30.6% higher.
• 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.