The Smart Investor
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The Smart Investor

JP Morgan Stock — Probably, The Good Times Are Over

JP Morgan is a company that needs no introduction. As one of the oldest investment banks in the country, it has lately been expanding to cater to consumers instead of just institutions and corporations. Since its merger with the Chase Manhattan Bank in 2000, the company is one of the largest credit card issuers and retail bankers in the US and has a substantial investment banking arm. However, a rise in price over the last few years may just have made its stock an unworthwhile investment.

Until around 2000, JPMorgan was a traditional investment banking, offering underwriting and advisory services. Since its merger with Chase Manhattan, the company has undergone a renaissance of sorts, not only broadening its total portfolio of products but consistently adding to it.

That trend continues even now. For example, while the largest banks have been offering access to crypto products for wealthy investors for some time, JP Morgan recently became the first to offer five crypto funds to its entire client base.

The company is also in the process of acquiring startups that could synergize with their current business, as well as other viable investment opportunities. Earlier in August, the company acquired a $50 million stake in Vera Whole Health. This company provides a subscription-based healthcare program for corporate employees. JP Morgan employees will also be able to participate in the scheme, allowing the company to improve its image as an employer while simultaneously exposing itself to capital gains further down the road.

Branching out of its age-old business of investment banking is necessary. Previously, investment banks were the only viable method for large private companies to go public. In the last decade, this practice has changed through the advent of direct listings and the more recent Special Purpose Acquisition Companies.

Apart from its investment banking operations, JP Morgan trades equities and other asset classes with its own capital. This means that when the market is performing well, the company has a greater chance to generate higher profits. However, suppose the market was to fall in the next couple of years. In that case, JP Morgan’s profits can drop considerably, exposing the company to market risk.

The only business division that is expected to perform better in the future is the consumer credit one. Credit card debt fell during the pandemic due to increased financial responsibility. Still, experts suggest that this is about to change. Credit card debt is once again expected to rise over the next few years, with a total of $2 trillion in forced savings about to be used to make purchases on consumer goods very soon.

JP Morgan is trying to combat this through new products that could bring in new customers. It recently launched a new real-time payments service that allows its clients to send payment requests to clients, saving them time. It has also been introducing new investment schemes over the last few years, including those based on robo-advisors. However, it will be a while before these investment schemes garner a large enough client base to generate serious profits.

According to consensus estimates, JP Morgan is expected to do quite well in FY21, with a total net income above $41 billion instead of $27 billion in FY20. However, this is mainly due to the performance of the company’s existing portfolio, not an increase in revenue. Projected revenue for FY21 is $121 billion, only marginally greater than the $119 billion in FY20.

Beyond FY21, however, the company is expected to run into severe problems due to revenue stagnation and failure to replicate the performance of FY21. This is mainly because asset prices are not likely to rise at the same rate as FY21, leading to a subdued net income of $34 billion in FY22 and $36 billion in FY23. The P/E ratio, currently at 10.67, is expected to increase to 13.5 in FY22 and fall slightly to 12.4 in FY23.

This is consistent with our analysis above. JP Morgan was in a prime position to capitalize off the boom in asset prices post-pandemic. Like most other financial companies, especially those operating in traditional businesses such as banking and underwriting, the outlook is gloomy for the next few years, making JP Morgan a slightly risky investment with low upside and reasonably significant downside.

The original article published on Barchart.



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Baruch Mann (Silvermann)

Personal finance expert, investor for more than 15 years, digital marketer and founder of The Smart Investor (