Morgan Stanley Stock Can Grow 40% By 2023

Morgan Stanley (NYSE: MS) stock has just surpassed the level seen at the end of 2019, with its market cap standing at roughly $82 billion. The stock now trades at just above a 10x PE multiple based on the 2020 expected earnings, although the company is likely to post a drop in EPS for this year. Does this make the stock expensive? Probably not, considering that revenues could grow by 30% by 2023, with Net Income growing steadily, generating continued returns for shareholders. Here’s how this is possible.

For more details on Morgan Stanley’s historical performance, see our interactive dashboard what drove Morgan Stanley stock up 32% Since The End Of 2016

Morgan Stanley’s revenues could grow by around 30% from estimated levels of a little over $42 billion in 2020 to close to $55 billion by 2023, representing a CAGR of roughly 9% per year (for context CAGR was about 6% between 2016 and 2019). This expected increase in growth rate could be attributed to a few factors. The company has announced the acquisition of E*TRADE in February 2020, which provides online brokerage, and related products and services, primarily to individual retail investors. E*TRADE has around 5.2 million client accounts with over $360 billion of retail client assets. This would lead to more than $3.1 trillion in combined client assets and a large pool of 8.2 million client relationships to cross-sell wealth management products – 2.7x Morgan Stanley’s current client base. Further, Morgan Stanley currently provides its wealth management services under a full-service, advisor-driven model. However, this coupled with E*TRADE’s direct-to-consumer model and digital capabilities will enable the bank to position itself as a market leader across all three channels: Financial Advisory, Self-Directed, and Workplace. Notably, this union will also benefit Morgan Stanley’s digital banking business.

While we expect Morgan Stanley to see a drop in earnings  this year, the company could turn around operations in 2021 as provisions for credit losses are likely to decline post the Covid-19 crisis, and as its past Investments in technology to drive efficiency in the sales & trading business will start paying off. Further, integration of E*TRADE and Morgan Stanley will drive substantial cost savings due to more optimized use of technology infrastructure, shared corporate services, etc. coupled with overall lower service cost in the wealth management business due to introduction of direct to consumer model and other digital services like Robo-advisers (offered by peers Bank of America, Vanguard, etc.) for small investors. It’s probably reasonable to assume that as Morgan Stanley business gains scale, it can boost margins by about 20%, so we estimate roughly 22.1% adjusted net income margins by 2023. Considering our revenue projections of roughly $55 billion and 22.1% margins, $12.2 billion in Net Income and $7.68 in EPS  is likely possible by 2023.

Now if Morgan Stanley’s revenues grow 1.3x, the P/E multiple will shrink by about 36% of its current level, assuming the stock price stays the same, correct? But that’s what Morgan Stanley investors are betting will not happen! If Revenues expand 1.3x over the next few years, instead of the P/E shrinking from just above 10x presently to close to 7x, a scenario where the P/E metric falls more modestly, perhaps to just above 9x looks more likely. For context, Citigroup is trading at a P/E multiple of close to 7x (based on 2019 EPS), while Bank of America is trading at just below 10x. One might assume that Morgan Stanley will trade close to Bank of America as both the banks are market leaders in Wealth Management space. This would make growth in Morgan Stanley’s stock price by about 40% a real possibility in the next three years, taking its market cap close to $115 billion, translating into a P/E multiple of just above 9x based on our projected 2023 earnings for the company.

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