Bank of America (BAC 0.32%) has done a great job at winning over investors in recent times. The second-largest bank in the U.S. by assets has seen its shares soar 88% since late October 2023. But they're still trading about 14% off their all-time peak, which might prompt some investors to take a closer look.
Should you buy this financial stock while it's less than $50?
A banking giant
Because Bank of America has been around for such a long time, tracing its roots back to 1865, the company has developed into a enormous financial services entity that can serve a wide range of customers. This includes individuals and small businesses all the way to multinational corporations and governments.
Bank of America is a diversified giant. Consumers can sign up for checking and savings accounts, get credit cards or mortgages, and handle their investments. Corporations can raise equity or debt financing, and even get advice on mergers and acquisitions. This setup is beneficial because it means the business surely has whatever product or service you are looking for.
This also means Bank of American's revenue comes from many different places. In 2024, the largest revenue source was consumer banking, representing 42% of the business. But the wealth and investment management, global banking, and global markets divisions also were key sales drivers.
Consequently, the business has built up a wide economic moat. This helps protect Bank of America's position in a very competitive industry. One durable competitive edge comes from switching costs: as customers get locked in with multiple products their interest in leaving declines. Another advantage is scale. Being able to spread large fixed costs across the huge revenue base means consistent profits.
Warren Buffett-led Berkshire Hathaway is a major shareholder, with a 10% stake. The Oracle of Omaha certainly appreciates businesses that have staying power. Bank of America's diversified offerings and its wide moat definitely put it in this category.
NYSE: BAC
Key Data Points
Earnings power
One important factor that can have a big influence on how well a stock performs is the trajectory of earnings. Bank of America's profitability is notable. During the past decade, its net profit margin has averaged 26.2%.
Investors should think about what will drive higher profitability in the next few years, and thus boost the share price. Bank of America's net interest income decreased year over year in 2024, after soaring between 2021 and 2023. This may signal that the benefits of higher interest rates are fading.
Of course, the change in interest rates is important, although whatever happens is totally unpredictable. However, I think it's reasonable that the likelihood is for interest rates to be little changed, or even drop. The timing is unknown.
For Bank of America, this could mean it will be difficult for profit to meaningfully grow because the bank won't be able to charge higher rates to borrowers for loans that it originates. On the flip side, non-interest income and fees could pick up with a more favorable macroeconomic backdrop.
Set the right expectations
Despite whatever happens with interest rates, Bank of America isn't a fast-growing enterprise. It operates in a very mature part of the economy.
Consequently, the price investors pay matters quite a bit because that can have an important impact on potential returns. As of this writing, the shares trade at a price-to-book (P/B) ratio -- a key valuation metric for banks -- of 1.3. This is more expensive than the average of the past one-, three-, five-, and 10-year periods. And it's significantly more expensive than the 0.8 P/B multiple in October 2023, right before the stock went on an impressive run.
Even though the stock is below $50, I don't view Bank of America as a smart buy. I don't believe it can outperform the broader market during the next five years.
