MW Schwab's stock lagged rivals such as Robinhood last year. Here's why it could be a buy now.

By Gordon Gottsegen

Revenue growth and industry deregulation are likely tailwinds for the retail brokerage

Charles Schwab Corp. surprised investors with a fourth-quarter earnings beat on Tuesday, sending the stock higher. It was a solid start to what could be a strong year for Schwab.

But Schwab also needs a strong year - and then some - if it's to catch up with other brokerages.

Shares of Schwab $(SCHW)$ climbed 5.9% on Tuesday following the earnings call, putting shares up 9% year-to-date. Over less than a month, that's more than the 7.6% growth Schwab saw in all of 2024. Meanwhile, the S&P 500 index SPX advanced by about 23.3% last year.

Schwab stock struggled last year as the company dealt with lower interest rates leading to a drop in net interest revenue, and a forced transition of TD Ameritrade customers to the Schwab platform.

At the same time, shares of competing brokerages such as Robinhood Markets Inc. (HOOD) and Interactive Brokers Group Inc. $(IBKR)$ had a great year. Shares of Robinhood grew about 192.5% in 2024, and shares of Interactive Brokers grew around 114.4%.

But with 2024 behind us, a few things could boost Schwab's stock going forward.

One is Schwab's managed investing solutions, which have proven to be lucrative for the business. The company reported that revenue from the division grew 70% year-over-year in the fourth quarter, to $55 billion.

On top of that, Schwab saw interest-related revenue grow in the fourth quarter. The Fed has been in a rate-cutting cycle since September 2024, but the pace of cuts may slow down in 2025. With rates changing, it's important for Schwab to pay down high-interest debt, while increasing the interest-related revenue it can gain from its customers. The latest earnings call showed the company moving in the right direction.

"Consistently growing sweep balances is a key part of the company's future earnings growth story, and the company may be at the start of this key trend. Management plans to continue to pay down its supplemental funding and mentioned that it believes it will make enough progress in this area in 2025 and have enough liquidity and capital that it will likely commence some additional capital returns in 2025," Michael Wong, director and equity analyst at Morningstar, wrote in a note following the earnings call.

"We continue to believe in our investment thesis and project that earnings will increase by a double-digit percentage annually for the next several years," Wong wrote. Morningstar has set its fair value estimate for Schwab's stock at $87. Shares were trading around $80.50 on Wednesday.

Meanwhile, analysts at Morgan Stanley set their price target for Schwab at $84 in a January research note, up from its prior target of $74.

Also read: Trump's SEC should be good for Robinhood. The platform's latest SEC settlement is proof of that.

However, those same analysts ranked Robinhood as their top pick among brokerages, exchanges and market-infrastructure firms.

"We see a sustainable business model in HOOD that's expanding into different business lines with many vectors for growth that's not yet reflected in valuation and the shareholder base," Morgan Stanley analysts wrote, explaining why they were raising their price target on the stock. "We see attractive opportunity for HOOD to participate more aggressively in crypto given scope for deregulation and see upward bias to estimates given scope for sustained retail engagement as capital markets activity builds."

Interactive Brokers also announced fourth-quarter earnings on Tuesday - after market close. Interactive Brokers reported adjusted earnings of $2.03 per share and more than $1.4 billion in adjusted revenue - both beating analyst forecasts. Shares of Interactive Brokers opened around 7.4% higher on Wednesday, trading around $207.

Overall, the brokerage industry is positioned to potentially benefit from proposed deregulation from President Trump, as well as from what is viewed as a more industry-friendly U.S. Securities and Exchange Commission. This could boost Schwab's competitors, but it could also boost Schwab. And since this comes at an inflection point for Schwab's business, it could get Schwab's stock out of a multiyear slump.

Schwab hit an all-time closing high of $95.53 on Jan. 14, 2022, thanks to the COVID-era retail-investing boom that sent its stock upward for the second half of 2020 and all of 2021. But it has yet to close at a new high since. With the stock down around 14% from that high on Wednesday, Schwab may have to carry the fourth-quarter momentum to get it back to where it was three years ago.

-Gordon Gottsegen

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January 22, 2025 11:00 ET (16:00 GMT)

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