HSBC (LSE:HSBA) Stock Looks Undervalued On Fair Value But Overvalued On Earnings

HSBC Holdings has delivered a very strong 5 year share price gain, while the valuation checks send a mixed signal as the intrinsic value estimate points to upside but the market multiple view leans expensive. The recent swing in the stock adds extra focus on which of these signals investors should pay more attention to.

• Over 5 years, HSBC Holdings has returned about 4.4x, which puts more pressure on today’s buyers to think carefully about what is already reflected in the price.
• The ongoing restructuring of senior ranks and cost base can support profitability, while legal and credit risks linked to legacy Covid era lending may weigh on how much value investors are willing to ascribe.
• On broader checks, HSBC Holdings scores 2 out of 6, which leans expensive rather than a clear bargain even though the Excess Returns model suggests the stock trades below intrinsic value.

The issue now is whether HSBC Holdings’ current share price already reflects the Excess Returns upside case, or if the stock still offers enough value to compensate for the risks around its restructuring and credit exposures.

Spot opportunities that combine solid share price gains with valuation tension by scanning our hand picked 11 high quality undervalued stocks.

Is HSBC Holdings Still Cheap on Excess Returns?

The Excess Returns model looks at how much value HSBC Holdings can create above the return that shareholders require on its equity. For HSBC, the inputs point to a bank generating returns on capital that are higher than its estimated cost of equity.

The model uses a Book Value of £10.08 per share and a Stable EPS estimate of £1.92 per share, based on weighted future return on equity estimates from 16 analysts. With a Cost of Equity of £1.00 per share and an Excess Return of £0.92 per share, HSBC is assumed to earn an Average Return on Equity of 16.22% on a Stable Book Value that rises to £11.82 per share. This produces an Excess Returns intrinsic value estimate of about £22.75 per share. This compares to a lower current market price and implies the stock screens as 32.6% undervalued. The recent senior management reshuffle and job cuts help explain why the price may still lag the value that the model assigns.

On this Excess Returns view, HSBC Holdings appears undervalued relative to the earnings power implied by its projected returns on equity.

Our Excess Returns analysis suggests HSBC Holdings is undervalued by 32.6%. Track this in your watchlist or portfolio, or discover 11 more high quality undervalued stocks.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for HSBC Holdings.

Has HSBC Holdings Run Too Far on Earnings?

The P/E ratio is a useful way to see what you are paying today for each unit of HSBC Holdings’ earnings. On this measure, the stock trades on about 16.9x earnings, compared with an average of roughly 11.4x for the wider Banks industry and a peer group average near 11.3x.

The fair P/E ratio implied by our model is about 11.2x, which is lower than where HSBC Holdings currently trades. That gap suggests investors are paying a premium to the earnings level that the model would typically support for a bank with similar characteristics. This is the case even as the bank works through senior management changes and legal actions around some Covid era loans.

On the P/E multiple, HSBC Holdings stock appears overvalued relative to both peers and the model’s view of a fair earnings-based price.

See what the numbers say about this price — find out in our valuation breakdown.

The HSBC Holdings Narrative: What Would Justify Today's Price?

Simply Wall St Narratives for HSBC Holdings' stock pick up where the valuation puzzle leaves off. They explain which paths for future growth, margins and earnings would need to occur for the current price to appear too high or too low. Where a single ratio or model outputs one number, Narratives explore the future that number implies so you can observe how those conditions develop over time. They are available on Simply Wall St's Community page.

Community views on HSBC Holdings are split between a growth driven wealth story and concern that a lot of that promise is already priced in.

Bull case: 17% undervalued

"Rapid expansion of Wealth and new customer flows in Asia, including US$29b of net new invested assets with more than half from Asia and over 900,000 new to bank customers year to date, shows HSBC is plugged into long term growth in cross border capital and rising affluent wealth..."

Read the full Bull Case to see why HSBC Holdings could be undervalued

Bear case: roughly fairly valued

"Material ongoing investment in digital transformation, cost restructuring, and technology to maintain competitive parity may compress operating margins and consume capital, risking lower-than-expected shareholder returns if efficiency gains are not fully realized or are offset by rising compliance, cybersecurity, or regulatory costs..."

Read the full Bear Case to see why HSBC Holdings could be overvalued

Do you think there's more to the story for HSBC Holdings? Head over to our Community to see what others are saying!

The Bottom Line

For HSBC Holdings, the Excess Returns intrinsic value estimate points to clear upside while the P/E view flags the stock as overvalued versus peers. That split reflects a model that focuses on long term returns on equity and capital intensity, set against a market that already prices in a richer growth and sentiment story, especially after a sharp recent move. Broader valuation checks remain weak despite the intrinsic value signal, so the key question is whether current restructuring and credit risks eventually ease enough to close that gap. The crux is whether HSBC’s returns on equity stay strong enough for today’s premium earnings multiple to hold.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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