Where Does Southwest Stand After Elliott Management’s Surprise $1.9 Billion Stake?

If you’ve got Southwest Airlines on your radar, chances are you’re weighing your next move. Over the past month, the stock ticked up 3.2%, and it’s up 8.0% over the past year, which might have caught your attention if you’re watching the shifting landscape of airline stocks. While the last five years haven’t all been rosy, as Southwest is still down 11.4% over that period, the recent trends have been positive and the seven-day gain (1.5%) hints that some investors see renewed potential. These moves are not coming out of nowhere. As the travel sector adapts to changing passenger demand, cost pressures, and broader market volatility, Southwest’s stock continues to reflect both optimism and caution among investors.

But the real question is, is Southwest undervalued at these levels, or has the market already priced in most of the upside? If you’re looking for a simple scorecard, Southwest’s official value score clocks in at 0 out of 6 possible undervaluation checks, which is not the score value seekers hope for. Of course, numbers only tell part of the story. Before making any calls, let’s walk through what those valuation methods actually say about Southwest Airlines today. And stick around, because I’ll show you a smarter way to think about valuation at the end of our journey.

Southwest Airlines scores just 0/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Southwest Airlines Dividend Discount Model (DDM) Analysis

The Dividend Discount Model (DDM) is a classic valuation approach that estimates a stock’s fair value by projecting future dividends and discounting them back to today, based on the company’s dividend growth potential. The logic here is straightforward, as a stock’s value fundamentally depends on the present value of all expected future dividends.

For Southwest Airlines, the model’s inputs show an annual dividend per share of $0.78, a high payout ratio of 89.08%, and a modest return on equity at 4.52%. Growth is estimated at just 0.5% a year, calculated using the formula (1 - Payout Ratio) x ROE. This means almost all earnings are being paid out, leaving little room for meaningful reinvestment or higher future growth. The company’s financials reflect this cautious outlook, and the DDM estimates Southwest’s intrinsic value at just $7.73 per share, far below the stock’s recent trading range.

This suggests Southwest Airlines is currently trading at a premium that is not justified by its potential dividend payments, with the DDM pointing to the stock being 318.8% overvalued at current prices. Investors focused on dividend value should be wary that the upside, from this perspective, appears already more than priced in.

Result: OVERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Southwest Airlines.

Our Dividend Discount Model (DDM) analysis suggests Southwest Airlines may be overvalued by 318.8%. Find undervalued stocks or create your own screener to find better value opportunities.

Approach 2: Southwest Airlines Price vs Earnings

For profitable companies like Southwest Airlines, the price-to-earnings (PE) ratio is a practical and widely used valuation tool. The PE ratio essentially tells you how much investors are willing to pay for each dollar of earnings, offering a direct glimpse at market expectations and sentiment. Typically, faster-growing or safer businesses command higher PE ratios, while those with lower growth or higher risk trade at lower multiples.

Currently, Southwest’s PE ratio stands at 43.4x. To put this into context, the airline industry’s average PE is just 9.3x, and Southwest’s peer group average is 12.3x. On the surface, this makes Southwest appear quite expensive relative to its competitors and the broader industry.

This is where Simply Wall St’s “Fair Ratio” comes in. The Fair Ratio signifies what would be a reasonable PE for Southwest, considering its earnings growth, profit margins, risks, market cap, and sector specifics. Unlike a simple peer or industry comparison, the Fair Ratio customizes expectations to the company’s unique circumstances. For Southwest, the Fair Ratio is 28.1x, well below its current PE but above the industry and peer averages. This reflects certain strengths and justifies a premium, though not as much as the market is currently granting.

Since the actual PE of 43.4x is noticeably higher than the Fair Ratio of 28.1x, Southwest’s stock looks overvalued using this metric.

Result: OVERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Southwest Airlines Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let's introduce you to Narratives. A Narrative is simply your story about a company, connecting what you believe about its future with concrete estimates such as expected revenue, profit margins, and what you think the business could be worth. Narratives link the company’s outlook to a clear financial forecast and then to a potential fair value, giving more meaning to the numbers.

On Simply Wall St’s Community page, millions of investors use Narratives to map their views of companies such as Southwest Airlines to real forecasts, making investing more dynamic and actionable. Narratives are easy to create, letting you compare your fair value to the current price and see whether it might be time to buy, hold, or sell. Importantly, Narratives are updated automatically as news breaks or earnings reports drop, so your story can adapt to the latest information in real time.

For example, some investors believe Southwest’s moves into premium seating and new booking channels will drive long-term profit growth and see fair value above $46 per share, while others are cautious due to competitive risks and set their fair value below $19. Narratives let you blend your own research with the latest data so your valuation always reflects your unique perspective on the business.

Do you think there's more to the story for Southwest Airlines? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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