State Street stock has rallied; still undervalued as growth slows

State Street (NYSE: STT) is a leading financial services company with a market cap of over $25 billion. It offers diverse solutions to hedge funds, pension funds, and even retail investors. Its custodian business holds over $41.8 trillion in assets while its global advisors solution has over $4.1 trillion.

State Street operates its business in two main areas: investment servicing and investment management. Its servicing business is made up of State Street Investment services, Global Markets, Alpha, and Digital. Its investment management division is made up of its ETF business, including the SPDR S&P 500 fund which has almost $600 billion in assets.

State Street’s total revenue has been steady in the past few years. It moved from over $11.7 billion in 2019 to over $11.89 billion in 2023. State Street’s hype has grown by 133% in the past 24 hours. Its stock ended last week at $84.50.

Positive hype

State Street’s hype has jumped recently as its stock jumped to its highest point since March 2023. It has soared by over 21% from its lowest point in June, meaning that it is in a technical bull market.

• State Street published results that were better than expected on July 16th. Its revenue rose to $3.19 billion, beating the consensus by $45 million. It was the third consecutive quarter of revenue beat. 

• Its earnings per share rose to $2.15, higher than the consensus estimate of $2.02. Its actual EPS has beaten estimates three times. 

• The company continued attracting funds from its clients as assets under custody rose to $44.3 trillion and its assets under management rose to $4.4 trillion. The AUM figure makes it the fourth biggest company in the industry after Blackrock, Vanguard, and Fidelity. 

• State Street also increased its dividend by 10% for the fourth consecutive year, bringing its yield to 3.60%. It has grown its dividend for 13 consecutive years. It also has room to grow its payouts because of its tiny 35% payout ratio.

• State Street has also generated hype after announcing plans to enter the blockchain industry. It is considering using tokenization by creating its internal stablecoin that will be used to settle payments. Also, the company will create a deposit token.

• Other companies in the industry have entered the industry. Blackrock created the BUIDL asset that has attracted over $500 million in assets. Also, Franklin Templeton, Invesco, and Blackrock have launched their Bitcoin ETFs. 

• Wall Street analysts have a neutral outlook for the stock with 12 of the 20 tracking the company having a hold rating. The average stock target is $90, higher than the current $84.49.

Negative hype

State Street faces numerous negative hype among investors, including:

• The company’s growth rate has been weaker than other companies like Blackrock and Franklin Resources. Its revenue growth is minus 2.30%, lower than the sector median of 4.5%. Forward revenue growth rate of 2.06% is also lower than the sector median’s 5.18%.

• Its SPDR S&P 500 ETF is losing market share to Vanguard and Blackrock. It has $557 billion in assets while the iShares Core S&P 500 ETF has crossed the $497 billion level and is seeing substantial inflows. The Vanguard S&P 500 ETF has $483 billion in assets. Analysts expect that these funds will overtake SPY, which could see it reduce its fees.

• State Street’s stock has also become highly overbought with the Relative Strength Index (RSI) rising to 80 and the two lines of the Stochastic Oscillator moving to below 100.

Final thoughts on State Street

State Street published earnings that were better than expected. However, the company’s trend is not all that strong as its other competitors are doing much better. For example, Blackrock’s revenue increased by 8% in Q2 while its AUM reached a record high of $10.6 trillion. It seems like State Street is more risk-averse than Blackrock, which is hindering its performance.

State Street’s stock is clearly undervalued since it has a price-to-earnings ratio of 15.8 and a PEG ratio of 1.02. These numbers are lower than the S&P 500’s average of 21, meaning that the company is cheap. However, the blended S&P 500 revenue growth stands at 9.7%, its highest point since 2021.

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