Bank Of America (BAC) Stock May Be 39% Undervalued As AI Spending Rises

Bank of America has delivered a 3 year share price gain that puts real money on the line for long term holders, which naturally raises the question of whether the current valuation is supported by the returns the bank earns on its capital.

• Over the past 3 years the stock has returned about 127.9%, so any view on Bank of America now hinges on whether that move still lines up with the profitability of every dollar the bank has put to work.
• Management is ramping up spending on artificial intelligence across platforms such as Erica and treasury tools like AskGPS and CashPro, which can influence how efficiently capital is used and how much extra return the franchise can squeeze from its existing asset base.
• Prefer to judge Bank of America on earnings? See what Bank of America's 12.0x P/E says about the price.

For investors, the debate is whether the returns Bank of America earns on its capital are strong and durable enough to make today's share price look well supported on that basis alone.

If you want to stress test Bank of America against a wider field of companies that have been filtered for balance sheet strength and fundamentals, a focused stock screen is a useful next step via the solid balance sheet and fundamentals stocks screener (25 results).

Does Bank of America Look Undervalued on Excess Returns?

The Excess Returns model looks at how profit on each dollar of equity compares with the return investors demand, then builds an intrinsic value from that gap. For Bank of America, the inputs show book value of $39.34 per share and an average return on equity of 12.64%, against a cost of equity of $3.47 per share. The model uses a stable earnings figure of $5.48 per share and a stable book value of $43.38 per share, both drawn from future estimates by 13 analysts, to anchor those return assumptions.

That framework produces an excess return of $2.02 per share, which means the business is expected to earn more on its equity base than the model treats as the required charge for risk. The Excess Returns projections put Bank of America's estimated intrinsic value substantially above the current share price of $54.96. The valuation gap stems from these sustained surplus returns on capital rather than aggressive growth forecasts. Bank of America's plan to double its AI budget next year helps explain why some investors may see room for those excess returns to persist if the technology spending continues to support efficiency and fee income. Find out what Bank of America could be worth using our Excess Returns estimate.

The Bank of America Narrative: What Would Justify Today's Price?

Simply Wall St Narratives pick up where the valuation puzzle for Bank of America leaves off by explaining which paths for growth, profitability and earnings would need to occur for the stock to be worth materially more or less than today's price, all housed on the Community page. Rather than relying on a single multiple or model figure, each narrative sets out the specific assumptions behind its view of fair value so you can compare those expectations with the results Bank of America actually delivers over time.

One of the top community narratives on Bank of America: 19% undervalued

"Bank of America's continued investment in digital engagement and AI-driven efficiencies is expected to enhance customer acquisition and retention, potentially increasing revenue and net margins over time..."

Discover why this Narrative puts Bank of America at 19% undervalued.

For Bank of America, the share price is only one piece of the decision

Before making any call on Bank of America, it helps to understand who is actually steering the franchise, how their incentives are structured, and whether those rewards line up with your priorities as a shareholder. See who runs Bank of America and how they are paid.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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