TipRanks Smart Value #61: Rebound Thesis

Shrilekha Pethe on May 5, 2026

Dear Investors,

Welcome to the 61^st edition of the TipRanks Smart Value Newsletter.

This Week’s Top Value Pick: Charles Schwab Corp. (SCHW)

Charles Schwab Corp. (SCHW) is a U.S.-based financial services firm offering brokerage, wealth management, and banking solutions, including trading, advisory, asset management, and custodial services. The company serves a broad client base spanning individual investors, independent advisors, and institutional clients, with a strong position in retail brokerage and registered investment advisor (RIA) custody.

Scale Advantage

Charles Schwab traces its origins to 1971, when Charles R. Schwab founded the firm as a traditional brokerage. A major inflection point came in 1975 following the deregulation of brokerage commissions, enabling Schwab to pioneer a discount brokerage model that significantly lowered trading costs and attracted a rapidly expanding base of self-directed investors. This shift established a scalable, transaction-driven platform and laid the foundation for long-term asset growth.

Through the 1980s and 1990s, Schwab broadened its capabilities into mutual funds, retirement accounts, and advisory services, while investing early in online trading technology to deepen client engagement. In the following decades, the firm shifted toward an asset-gathering model, expanding fee-based advisory and custody services while building Schwab Bank to generate net interest income from client cash balances, diversifying earnings beyond trading activity.

The company’s most transformative expansion came in 2020 with the acquisition of TD Ameritrade, creating a combined platform with roughly $6 trillion in client assets and tens of millions of accounts. The integration, completed in 2024, delivered significant scale, operating leverage, and cost synergies estimated at up to $2 billion, materially enhancing earnings power.

Alongside this deal, Schwab executed a series of targeted acquisitions in 2020, including USAA Investment Management Company, which added approximately $80 billion in client assets and a strategic referral partnership; Wasmer Schroeder & Co., strengthening fixed-income capabilities; and Motif Investing, enhancing digital and thematic investing tools. More recently, the acquisition of Forge Global Holdings expanded Schwab’s presence in private markets, broadening access to alternative investments.

Following the acquisition of TD Ameritrade, Toronto-Dominion Bank (TD Bank) emerged as a significant shareholder in Charles Schwab, holding a sizable equity stake as part of the transaction structure. In early 2025, TD Bank announced plans to divest its approximately 10% ownership position, marking a shift in its capital allocation strategy. As part of this transition, Schwab agreed to repurchase shares, supporting capital return and balance sheet flexibility.

Schwab’s evolution reflects a consistent strategy of combining scale, technology, and asset gathering, transforming it into a diversified financial platform with recurring revenues, expanding margins, and sustained earnings growth.

Flow Economics

Charles Schwab operates a diversified financial services model centered on asset gathering, client engagement, and balance sheet monetization. The company generates revenue from net interest income, asset-based fees, and transactional activity, supported by a large and growing base of client assets across brokerage, advisory, and banking platforms.

A key earnings driver is net interest income, generated from client cash balances held in brokerage accounts and swept into Schwab Bank. These balances are invested in high-quality securities, allowing Schwab to earn a spread between asset yields and interest paid to clients. Given the scale of cash balances and low funding costs, this remains a significant and scalable profitability driver, particularly in higher-rate environments.

Asset-based fees represent another core revenue stream, tied to assets under management (AUM) and administration. Schwab earns advisory fees through its wealth management platform and management fees from proprietary funds and ETFs. Its custody platform for registered investment advisors generates recurring revenues linked to client assets, supported by high retention and switching costs.

The company also generates transactional and trading-related revenues, including order flow, margin lending, and options activity. While sensitive to market conditions, these revenues are supported by a large and highly engaged client base.

Looking ahead, earnings growth is driven by continued client asset inflows, deeper wallet share, and platform scale. The integration of TD Ameritrade has expanded the client base and improved operating leverage, while ongoing investments in digital platforms and advisory capabilities support engagement and cross-selling.

Monetization Play

Charles Schwab is also advancing targeted initiatives to expand its platform and enhance monetization.

A key driver is platform expansion, particularly in wealth management and private markets. The firm generated strong advisory momentum, with Schwab Wealth Advisory delivering record net inflows of $10 billion in the first quarter, up 90% year-over-year, with roughly 30% sourced from legacy TD Ameritrade clients. Managed investing net inflows also rose 46% to a record level. At the same time, the acquisition of Forge Global expands access to private markets, enabling clients to invest in pre-IPO companies through direct purchases and fund structures. This also creates opportunities to cross-sell custody, equity administration, and lending solutions to private companies. More than $17 billion in private company shares have been traded on its platform, enabling Schwab to offer direct investments as well as single- and multi-company fund exposure.

Monetization remains a central focus, with multiple levers across the platform. Schwab is renegotiating economics with more than 400 asset managers on its ETF platform, with the strategy expected to be implemented by year-end and a greater revenue opportunity tied to higher-fee active ETFs. Physical expansion remains part of the strategy, with plans to open around 12 new branches in 2026, as clients with financial advisors tend to generate significantly higher asset inflows and engagement.

Client cash balances, often referred to as “cash sweep,” continue to represent a meaningful earnings driver, accounting for roughly 10% of total client assets, with transactional sweep balances closer to 4%, or about $10,000 per account on average. While clients have access to simple tools to reallocate cash, often in just one click, the company emphasizes that many choose to keep liquidity in place for trading, spending, or portfolio flexibility. This is reinforced by the scale of activity on the platform, with approximately $200 billion moving in and out of accounts each month and about $300 billion in equities traded over a two-day period, reinforcing the structural nature of these balances. Management views potential AI-driven cash optimization as a monetization opportunity, potentially delivered through advisory or fee-based services rather than spread income alone.

Trading activity remains elevated, with daily average trades reaching a record 9.9 million in Q1. However, management noted that in the current macro environment, shaped by geopolitical uncertainty, tariff risks, and mixed economic signals, client behavior is being influenced in ways that pressure monetization. Clients are trading more frequently but with lower conviction, favoring smaller positions and equities over higher-fee investments such as options. This reduces revenue per trade despite strong volumes. Management views this as cyclical, with potential upside to trading revenue per trade if market conditions normalize and derivatives activity recovers.

Technology, particularly artificial intelligence, is emerging as a key lever for both growth and efficiency. Schwab is deploying AI across its 33,000 employees, including more than 8,000 technologists using AI for development and automation. Client-facing tools include Portfolio Insights, which is launching shortly and will provide tailored analysis of performance, risk, and asset allocation, as well as an AI-powered assistant expected in June to enhance client interactions and improve both service and efficiency, alongside generative search capabilities planned for later in 2026. Internally, the Schwab AI Service Assistant already supports approximately 60,000 client interactions per day, enhancing productivity and service quality while contributing to operating leverage.

Finally, Charles Schwab is selectively expanding into adjacent areas to support long-term revenue diversification. The company is exploring exchange-listed financial-event products such as binary options tied to economic or corporate outcomes, while avoiding speculative categories like sports betting and political markets. In alternatives, Schwab is building exposure to private equity and private credit, where allocations are gradually increasing as investors seek diversification. It is also seeing growing interest in long/short strategies, which are capital-efficient and enable participation in both rising and falling markets. The company is also entering digital assets through a phased rollout of spot crypto trading at pricing of roughly 75 basis points. Additionally, Schwab has introduced structured asset lending, allowing clients to borrow against a broader range of holdings, deepening engagement and creating incremental fee and lending revenue opportunities.

Growth Rebound

Charles Schwab’s financial performance over the past three years reflects a recovery cycle rather than a period of steady compounding. Revenues and EPS grew at a CAGR of 4.8% and 9.7%, respectively, as results were initially pressured by the 2022–2023 “cash sorting” dynamic, which reduced low-cost funding and compressed margins. As this headwind reversed between 2023 and 2025, performance rebounded sharply, supported by the repayment of high-cost funding, expansion in net interest margins, completion of the TD Ameritrade integration with meaningful cost synergies, and strong asset inflows that lifted fee-based revenues. This recovery phase also drove operating leverage and share buybacks, allowing EPS to outpace revenue growth.

That momentum carried into the most recent quarter, where Schwab delivered broad-based growth across its platform. Total revenue increased 16% year-over-year to $6.5 billion, driven by double-digit growth across net interest income, asset-based fees, and trading activity, although it came in slightly below expectations. Adjusted EPS rose 38% to a record $1.43, supported by an adjusted pre-tax margin of 51.4%, highlighting the scalability of the business. Client engagement remained strong, with total client assets rising 19% year-over-year to $11.8 trillion and net new assets reaching $158 billion, marking a first-quarter record. The firm also added 1.3 million new brokerage accounts, up 10% year-over-year, reflecting continued client acquisition momentum.

Revenue growth was well balanced across segments. Net interest revenue increased 16%, asset management and administration fees rose 15% to a record $1.8 billion, and trading revenue grew 20% on elevated activity levels, while bank deposit account fees also expanded. At the same time, adjusted expenses increased just 5%, well below the pace of revenue growth, driving meaningful operating leverage. Net interest margin improved to 2.88% from 2.53% a year earlier, reflecting a more favorable funding mix and improved balance sheet dynamics.

Balance sheet trends further reinforced this improvement. Total bank loan balances grew 29% year over year to $61 billion, while client margin loans reached approximately $127 billion. Transactional sweep cash increased by $8 billion during the quarter, with $25 billion inflows in March, signaling continued normalization in client cash behavior. The adjusted Tier 1 leverage ratio¹ stood at 6.8%, within the company’s 6.75%–7% target range, indicating a well-capitalized and efficiently managed balance sheet.

Looking ahead, management indicated that FY26 earnings are tracking above the prior $5.70–$5.80 guidance range, which had assumed two rate cuts and excluded the impact of buybacks and the Forge acquisition. With the rate outlook now more stable, Schwab expects a more favorable net interest margin trajectory, positioning the company to sustain earnings growth as operating leverage, client asset inflows, and balance sheet normalization continue to support performance.

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1- The adjusted Tier 1 leverage ratio measures core capital relative to total assets, incorporating adjustments such as accumulated other comprehensive income (AOCI), which can impact the value of securities on the balance sheet and provide a more accurate view of current capital strength and interest rate sensitivity.

Recovery Repricing

Over the past year, SCHW’s shares have risen by more than 9%, reflecting a recovery driven by the unwinding of prior financial pressures that had weighed on earnings and sentiment. Between 2023–2024, the company faced a “cash sorting” crisis, where clients shifted sweep deposits into higher-yielding money market funds, forcing greater reliance on expensive supplemental funding and compressing margins. As this trend reversed in 2025, funding pressures eased, supporting margin expansion and a more normalized, stable earnings base. The completion of the TD Ameritrade integration further removed a major overhang, unlocking significant cost synergies and improving operating leverage.

This improved operating backdrop is reflected in Schwab’s valuation. SCHW trades at more than a 20% discount to its historical averages based on non-GAAP trailing and forward P/E ratios, while it sits at a modest premium based on the forward price/book ratio. Compared to its peers like Interactive Brokers, LPL Financial, and Morgan Stanley, SCHW is trading in the low valuation range based on non-GAAP trailing and forward P/E ratios and in the higher valuation range based on the forward price-to-book ratio, while its ROE remains broadly comparable with asset-light platforms like Interactive Brokers and LPL Financial and higher than more capital-intensive peers like Morgan Stanley. This is because the price-to-book ratio reflects how the market values the company’s net assets relative to the returns those assets generate. Businesses with higher and more durable ROE typically command higher multiples, as the market assigns greater value to each unit of capital employed. In Schwab’s case, its integrated brokerage–banking model generates a stable mix of recurring revenues from client cash, advisory fees, and scalable AUM-based income, resulting in more predictable and less capital-intensive cash flows than peers with heavier balance sheets or more cyclical revenue streams.

From a value investor’s perspective, this combination helps reconcile the valuation profile. The discount on earnings multiples suggests that parts of the recovery are not fully priced in, while the premium on book value reflects the quality and sustainability of returns. Ultimately, the market appears to be valuing Schwab less for peak profitability and more for its consistent, scalable, and lower-cyclicality earnings profile.

Analysts remain bullish about SCHW as the company is showing stronger profitability and operating leverage, with revenue growth and high margins supporting improved earnings quality and long-term cash generation capacity. At the same time, a strengthened balance sheet with low leverage enhances financial flexibility, enabling the company to pursue capital returns, strategic acquisitions, and resilience across interest rate cycles.

In addition, Schwab’s expansion into private markets through its acquisition of Forge broadens its product suite into alternatives, creating opportunities to deepen client relationships and diversify fee income beyond traditional trading and interest-based revenues.

Street consensus implies roughly 30% upside from current share levels, with more bullish forecasts implying an upside of around 43%. This optimism is reinforced by discounted cash flow analysis, which indicates that SCHW shares may be trading at an estimated 27% discount to intrinsic value, suggesting meaningful valuation support for investors.

Charles Schwab has resumed returning more capital to shareholders following the balance sheet pressures it faced in 2023–2024. After pausing dividend increases during that period, the company reinstated growth with a 19% hike in its quarterly dividend to $0.32 per share in the first quarter of 2026.

Despite this increase, Schwab maintains a relatively conservative payout, distributing roughly 22% of adjusted earnings, which preserves flexibility for reinvestment and balance sheet management. At the same time, the company continues to prioritize share repurchases as its primary capital return lever, buying back $2.4 billion of stock in the first quarter alone.

Investing Takeaway

Charles Schwab presents a compelling value proposition as the market continues to price the stock below its normalized earnings potential despite clear signs of recovery. The business has moved past its balance sheet pressures, with improving margins, stronger operating leverage, and a more stable funding base supporting a higher-quality earnings profile. Importantly, its diversified model, anchored in recurring revenues from client assets, advisory services, and cash monetization, provides durability that is not fully reflected in its valuation.

For value investors, the opportunity lies in this disconnect between improving fundamentals and still-muted multiples. As earnings normalize and capital returns resume, Schwab is positioned as a high-quality compounder that is temporarily priced like a cyclical recovery story.

Category: Smart Value