Charles Schwab shares plunge 9% after Q2 earnings: Time to buy or sell?
Shares of The Charles Schwab Corporation (NYSE: SCHW) plunged over 9% today following the release of its Q2 earnings report. The financial services giant reported a mixed bag of results, with some metrics exceeding expectations while others fell short, raising questions about the company’s future trajectory in a highly competitive environment.
Earnings and revenue highlights
Charles Schwab posted Q2 earnings per share (EPS) of $0.73, slightly above the consensus estimate of $0.72. However, its revenue of $4.69 billion missed analyst expectations by $10 million, marking a modest year-over-year increase of 0.6%.
The firm’s performance was dampened by a notable decline in net interest revenue, which dropped to $2.16 billion from $2.23 billion in the previous quarter and $2.29 billion a year ago.
Net new assets and client activity
In terms of client activity, Schwab reported total net new assets of $74.2 billion for Q2, a decrease from $88.2 billion in Q1 but an improvement from $72.0 billion in Q2 2023.
The firm’s total client assets reached a record $9.4 trillion, up 17% year-over-year. However, the growth in core net new assets slowed, reflecting a potential cooling of investor enthusiasm.
Analyst views & fundamentals
The market’s reaction to Schwab’s earnings release was swift and severe. Analysts have been divided on the stock, with some pointing to the company’s robust asset growth and potential for earnings improvement in the long term.
For instance, Keefe, Bruyette & Woods recently upgraded Schwab to “Outperform” from “Market Perform,” citing expected robust earnings growth in the 2026-2030 period. However, concerns remain about the firm’s immediate challenges and competitive pressures.
Fundamentally, the firm’s Tier 1 Leverage Ratio stands at 9.4%, with an adjusted Tier 1 ratio of 5.9%, indicating solid capital adequacy.
Despite this, Schwab’s bank deposit account balances have been declining, dropping to $84.5 billion in Q2 from $90.2 billion in the previous quarter and $102.7 billion a year ago.
This decline is partly offset by an increase in money market fund assets, which rose to $533.6 billion from $515.7 billion in Q1.
Valuation concerns
Valuation remains a contentious issue for Charles Schwab. The company’s forward price-to-earnings (P/E) ratio currently stands at 23.43, significantly higher than the sector median of 10.16. This premium valuation, coupled with the company’s recent operational challenges, suggests that the stock may be overvalued.
The firm’s revenue growth trajectory, while positive, is expected to remain below the sector median, raising questions about the sustainability of its high valuation.
Operational and strategic challenges
Charles Schwab has faced several operational setbacks in recent years, including technical outages and integration challenges following its acquisition of TD Ameritrade.
These issues have led to customer dissatisfaction and have provided an opportunity for competitors like Robinhood to gain market share.
Robinhood’s aggressive customer acquisition strategies, including enticing offers and a user-friendly platform, have attracted clients from Schwab, adding to the competitive pressure.
Recent developments and future outlook
Looking ahead, Schwab’s management has highlighted several strategic initiatives aimed at improving profitability and client service.
CFO Peter Crawford noted that the company is focused on reducing bank-level debt and expanding net interest margins over the next several years.
However, the firm’s decision to keep stock buybacks on hold has raised concerns among investors about capital return strategies.
Despite these challenges, Schwab continues to see growth in its asset management and administration fees, which increased to $1.38 billion in Q2 from $1.35 billion in Q1. The firm’s ability to adapt to changing market conditions and competitive dynamics will be crucial in determining its future performance.
As we consider these fundamental aspects, it is also crucial to analyze the stock’s technical patterns to gain a comprehensive view of its potential price trajectory.
By examining the charts, we can better understand the stock’s recent movements and identify key support and resistance levels, helping to inform our investment decisions in this volatile environment.
Remains in a long-term downtrend
Schwab’s stock has been in a downtrend since the start of 2022, making lower highs and lower lows since then. Despite appreciating almost 60% from its lows of October 2023, today’s move has validated that the stock continues to be in a long-term downtrend.
With today’s move, the stock has entered a bearish phase across timeframes. Hence, investors looking at today’s dip as an opportunity to buy the stock must wait for it to stabilize first before initiating a long position.
If the stock manages to trade above its 50-day moving average, currently hovering around $65.82, in the coming days one can consider a long position.
Traders who have a bearish view on the stock but didn’t short it before the Q2 earnings release must also wait for the stock to give a daily closing below the 50-day moving average before initiating fresh short positions.
If we get a daily closing below the 50-day moving average, one can short the stock with a stop loss at $76.75. If the bearish momentum continues, we can see the stock falling back to its October 2023 lows near $50, where one can book profits.
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