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HSBC’s (LSE: HSBA) share price has risen 49% from its 9 April 12-month traded low of £6.98.
This probably looks a bit off-putting to some investors on the assumption that it surely cannot rise much further. Others might think now is the perfect time to jump on the bandwagon and ride the bullish momentum.
But for me, these price-based views are irrelevant. The only thing that counts in my experience is whether there is any value left in the stock.
So, is there, and how much?
Pinning down ‘fair value‘
A discounted cash flow analysis of HSBC shows its shares are 39% undervalued at their current £10.38 price.
Therefore, their ‘fair value’ is £17.02.
This gap between the fair value and the current price is crucial for making major long-term profits, in my experience.
The reason is that all asset prices tend to converge to their fair value over time, up or down.
Earnings outlook is vital
Free cash flow is the key driver for any firm’s growth over time, as it can be used to fund business expansion.
The greater a firm’s earnings, the more free cash flow it is likely to have, and the more it can expand. And the more it can do this, the higher its share price will rise, and its dividends too.
And ultimately, this cash comes from a company’s earnings (or ‘profits’).
In HSBC’s case, a key risk to its earnings is declining interest rates in its key markets. This can squeeze profit margins.
That said, the consensus view of analysts is that its earnings will grow by an average of 13.8% a year to end-2027.
Do recent results support this view?
Supportive of this forecast to me is the long run of strong results generated by the bank in recent years. For instance, its pre-tax profit for full-year 2024 hit $32.3bn (£24.6bn), up $2bn from 2023.
Much of this reflected a clever shift in HSBC’s strategy towards fee-based rather than interest-based business. Wealth and personal banking delivered over a third of its 2024 profits with this share expected to increase in 2025.
At that point, HSBC targeted a return on tangible equity (ROTE) in the mid-teens in each of the three years from 2025 to 2027. Unlike return on equity, ROTE excludes intangible elements such as goodwill.
Its latest numbers – Q3 2025 published on 28 October – were hit by a $1.1bn charge relating to the Bernard Madoff Ponzi scheme. Despite this, it saw a 15% rise in profit before tax over the previous quarter to $7.295bn.
It also raised its ROTE target for this year to “mid-teens or better” from mid-teens only.
My investment view
I already have shares in HSBC, bought at a much lower price than now.
However, given the still-strong earnings growth prospects and the still-large undervaluation, I will buy more soon.
But this is not the only stock I see building momentum in this sector.
