VALUATION HIGHLIGHTS
- Direct Banking (Discover Credit Cards, Student Loans & Other, Investment Gains & Other Income) constitutes 89% of the Trefis price estimate for Discover's stock.
- Payment Services constitute 11% of the Trefis price estimate for Discover's stock.
WHAT HAS CHANGED?
- Latest Earnings
In Q4 2024, Discover Financial reported revenues of $4.76 billion, which was 10% more than the year-ago period, while earnings jumped over 3x to $5.11 per share. The company benefited from higher net interest margins, moderate loan growth, as well as some credit improvements.
- Acquisition By Capital One
Capital One announced a deal to acquire Discover Financial for about $35.3 billion in early 2024. However, more than a year after its announcement, the merger remains delayed pending approvals from the Office of the Comptroller of the Currency, the Federal Reserve, and the Department of Justice. While the deal was initially expected to close by early 2025, Discover has now extended the deadline to May 19 as regulatory scrutiny continues. Meanwhile, Capital One faces additional challenges, including a civil lawsuit from Donald Trump’s company.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below, we look at the key drivers that present an upside or downside to our price estimate for Discover Financial.
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Average Credit Card Loans Outstanding Discover's average credit card loans outstanding increased from $69 billion in 2021 to $100 billion in 2024. We expect the average credit card loans to grow at an annual rate of 4% and reach ~$125 billion by the end of the Trefis forecast period. However, there would be a 9% upside to our price estimate if loans outstanding reach $150 billion by the end of our forecast period.
BUSINESS SUMMARY
Discover Financial Services is a major U.S. credit card issuer and electronic payments company. Discover provides credit cards, personal and student loans, and deposit products. It also operates the Discover Network for credit card payments, the PULSE Network for debit and ATM transactions, and Diners Club International for global payments. In early 2024, Capital One announced plans to acquire Discover in a $35.3 billion deal, which is pending regulatory approval.
SOURCES OF VALUE
Strong position in student loan market
Discover is one of the largest student lenders in the U.S., behind Sallie Mae and Wells Fargo.
Strong position in credit card market
Discover currently has the # 4 position in the U.S. payment-card network after Visa, MasterCard, and American Express. We expect the company to maintain this strong position throughout our forecast period.
KEY TRENDS
Below are some trends that could have a significant impact on Discover and the credit card industry in general:
- Greater use of credit and debit cards
- Americans spent more using cards than with either cash or checks. Even outside the U.S., cards are increasingly used for making payments. That being said, Buy Now, Pay Later (BNPL) services and digital wallets are growing as alternatives to traditional credit cards.
- Growth in Online and Mobile Shopping
- Cards are a preferred mode of payment for online shopping. Online retail sales in the U.S. have been growing at a strong rate over the past decade. Mobile commerce (m-commerce) now drives a significant portion of e-commerce growth, with digital wallets such as Apple Pay, Google Pay, and PayPal becoming more popular.
- Growth In Mobile and Digital Payments
- Mobile phone payments are quickly gaining popularity, driven by a surge in smartphone sales. Digital wallets, peer-to-peer payment apps, and contactless payments are also helping to reshape consumer habits, and this is also integrating credit and debit cards into the mobile ecosystem.
