NEW YORK, NY – A recent in-depth analysis of Morgan Stanley (MS) suggests that the financial titan, trading at $144.14 as of July 5, 2025 , is significantly overvalued compared to its intrinsic worth of $86.83 per share. This valuation, derived from a comprehensive model incorporating Buffett-Inspired and McGrew valuation methods, indicates a premium of 66.01% above its intrinsic value.
As investors continuously seek opportunities where market price deviates from true value , Morgan Stanley presents an intriguing case within the financial services industry.
Understanding the Valuation Approach
Given Morgan Stanley’s classification as a financial services firm, specifically a brokerage and investment bank , the analysis focused on “Distributable Earnings” rather than the Free Cash Flow (FCF) metric typically used for non-financial companies. Distributable Earnings are defined as Net Income plus Non-Cash Charges (like Depreciation and Amortization), minus any increase in regulatory capital required for growth. The valuation model also adjusted net debt to account for restricted cash, such as client funds, which offsets certain liabilities.
Financial data from the trailing twelve months (TTM) ending March 31, 2025, was utilized for the assessment:
- Last Closing Price: $144.14
- Shares Outstanding: 1,606,806,297
- Net Income (TTM): $14,293,000,000
- Depreciation and Amortization (TTM): $5,051,000,000
- Total Debt: $327,657,000,000
- Cash and Cash Equivalents: $60,835,000,000
- Restricted Cash: $29,904,000,000
Growth Profile and Adjusted Net Debt
To determine growth, a 5-year Compound Annual Growth Rate (CAGR) of Distributable Earnings from 2020 to 2024 was calculated. The TTM Distributable Earnings (Year 0) were $19,344,000,000 (Net Income of $14,293,000,000 + Depreciation of $5,051,000,000). The historical data showed:
- 2024: $19,344,000,000
- 2023: $13,343,000,000
- 2022: $15,027,000,000
- 2021: $19,250,000,000
- 2020: $14,765,000,000
The calculated 5-year CAGR was approximately 6.96%. As this figure is below 10%, Morgan Stanley was classified as a non-growth stock, leading to a conservative 3% growth rate for the first 10 years and a 2.5% perpetual growth rate thereafter for both valuation methods.
Adjusted Net Debt, crucial for financial services firms due to restricted cash often linked to client liabilities, was calculated as: (Total Debt – Restricted Cash) – Cash and Cash Equivalents, floored at zero.
- Total Debt: $327,657,000,000
- Restricted Cash: $29,904,000,000
- Cash and Cash Equivalents: $60,835,000,000
This resulted in an Adjusted Net Debt of $236,918,000,000 , reflecting the typical significant restricted cash holdings of brokerages.
Valuation Methodologies Confirm Overvaluation
Both the Buffett-Inspired and McGrew valuation methods, which for non-growth stocks mirror each other, projected Distributable Earnings for 10 years at a 3% growth rate, calculated a terminal value, and discounted all cash flows to present value using an 8% discount rate.
Key calculations from the Buffett-Inspired method include:
- Year 1 Distributable Earnings: $19,924,320,000
- Year 10 Distributable Earnings: $25,979,122,324
- Terminal Value (Year 10): Approximately $484,156,370,581
- Present Value of Terminal Value: $224,458,863,694
- Sum of Present Values (Years 1-10): Approximately $151,989,611,053
- Enterprise Value: Approximately $376,448,474,747
- Equity Value: $139,530,474,747
- Intrinsic Value per Share: $86.83
With a 25% margin of safety, the intrinsic value drops to $65.12 per share.
Comparing the closing price of $144.14 to the intrinsic value of $86.83, the percentage difference is 66.01%. Based on the valuation criteria, where a closing price greater than 36% above intrinsic value signifies “Overvalued,” Morgan Stanley is clearly categorized as overvalued under both valuation methods.
Financial Health Metrics: A Mixed Picture
To provide a holistic view, the analysis also examined Morgan Stanley’s TTM Return on Equity (ROE) and Return on Tangible Assets (ROTA).
- Return on Equity (ROE): Calculated as (Net Income / Average Total Equity) * 100.
- Average Total Equity: ($106,812,000,000 + $99,198,000,000) / 2 = $103,005,000,000
- ROE = ($14,293,000,000 / $103,005,000,000) * 100 = 13.88% This 13.88% ROE indicates strong profitability relative to shareholders’ equity, aligning with industry benchmarks for financial services firms.
- Return on Tangible Assets (ROTA): Calculated as (Net Income / Average Tangible Assets) * 100.
- Tangible Assets (03/31/2025): $1,277,277,000,000
- Tangible Assets (03/31/2024): $1,204,867,000,000
- Average Tangible Assets: ($1,277,277,000,000 + $1,204,867,000,000) / 2 = $1,241,072,000,000
- ROTA = ($14,293,000,000 / $1,241,072,000,000) * 100 ≈ 1.15% The 1.15% ROTA reflects lower returns on tangible assets, which is typical for capital-intensive financial institutions with large balance sheets.
Implications for Investors
The analysis concludes that Morgan Stanley’s current market price of $144.14 significantly exceeds its calculated intrinsic value, classifying it as “Overvalued”. While the robust ROE of 13.88% highlights strong profitability , the modest ROTA of 1.15% and its non-growth classification suggest limited upside at current levels.
Investors are advised to exercise caution due to the 66.01% premium over intrinsic value. Waiting for a price closer to the $65.12 margin-of-safety level might be a prudent strategy. The solid ROE indicates efficient use of equity, but the low ROTA underscores the challenges of generating high returns on its extensive asset base.
Future catalysts, such as changes in interest rates or market volatility, could influence earnings. The analysis notes limitations, including the assumption of no increase in regulatory capital and potential inaccuracies due to incomplete data on client liabilities.
In conclusion, for value-focused investors, Morgan Stanley currently appears to be a “hold” or “avoid”. However, its strong fundamentals may still appeal to those prioritizing stability over immediate value. It is always recommended to verify financial data and consider broader market conditions before making investment decisions.