Investors should consider some key factors when looking at this bank.
It's been a good time to be an investor in Bank of America (BAC -1.25%). In 2024, its shares have jumped 17% as of mid-June. That gain outpaces the 14% rise of the S&P 500 index.
There's a lot of anticipation about when the Federal Reserve will start to cut interest rates. Perhaps the expectation that this accommodative behavior will happen soon has helped build up market sentiment for this top bank stock.
With momentum on its side, is Bank of America a smart business to buy shares in right now?
Muted growth prospects
One of the most important factors that I like to consider when looking at a company is its growth potential. With total assets of $3.3 trillion (as of March 31), Bank of America is already a massive enterprise. This makes it the second-largest banking entity in the U.S. Therefore, I believe it's best to limit your expectations about this company's growth prospects.
Bank of America has a huge deposit base of almost $2 trillion. While it does slowly expand, the gains aren't anything that can move the needle. And when it comes to loans, a primary way a bank makes money, this company is going backward. Its loan book shrunk in the last quarter.
It's hard to envision a future where Bank of America is able to register outsized growth. It has likely already fully penetrated the U.S., its key market. And as far as its products and services go, ranging from personal banking and commercial banking to wealth management and capital markets activities, I'd argue that there isn't an area within the financial services sector that this business doesn't already touch.
During the 10-year stretch between 2013 and 2023, Bank of America saw its revenue rise by 11%, or a compound annual rate of just 1%. If we look out over the next decade, I see no reason to believe the pace will be much faster.
Industry dominance
The banking industry is arguably one of the most competitive out there. Businesses sell what are otherwise just commoditized products and services. This situation makes it difficult to stand out among the crowd.
Bank of America goes head-to-head in various areas with other money-center banks, such as JPMorgan Chase, Wells Fargo, and Citigroup. They all have the talent, resources, and scale to keep attracting customers.
In the past decade or so, fintech enterprises have made a big splash thanks to their relentless focus on integrating technology to deliver a superior user experience. Businesses like PayPal, Block, Robinhood, and SoFi Technologies immediately come to mind, at least on the personal finance front.
But to its credit, Bank of America has the ability to defend its dominant position in the industry, not least because of its long track record of success. It has a strong brand that can help build trust with clientele. And it has the wide reach to keep bringing in customers and deposits, while also extending loans.
Consider the valuation
Another important factor to take into account is the stock's valuation. Because the shares have soared 49% since the start of November 2023, they don't look that attractively valued anymore.
As of this writing, the stock trades at a price-to-earnings (P/E) ratio of 13.6. This is almost double what it sold for late last year. And it's a higher valuation than the stock's trailing-five-year average P/E multiple.
Bank of America appears to be a bit overvalued right now, in my opinion. In fact, this is a stock that isn't likely to outperform the broader S&P 500 over the next five years, which is exactly what happened in the past five-year stretch. And that's why I would look elsewhere for an investment right now.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America, Block, JPMorgan Chase, and PayPal. The Motley Fool recommends the following options: short June 2024 $67.50 calls on PayPal. The Motley Fool has a disclosure policy.
