Schwab's Strong Q3 and Forge Acquisition Highlight Strategic Expansion Amid Regulatory Headwinds

What happened

Charles Schwab reported robust Q3 results with net income per share surging 60% year-over-year to $1.26, driven by resilient net interest income and disciplined cost management. The company announced an all-cash acquisition of Forge Global, aiming to access private markets and accelerate growth through platform integration, though the deal's success hinges on execution. This aligns with the DeepValue report's emphasis on Schwab's scaled custody model re-accelerating, with record client assets and completed TD Ameritrade integration supporting operating leverage. However, the article's optimistic portrayal of preferred stock accumulation overlooks ongoing risks, such as potential pressure on order-routing economics from upcoming regulatory changes like enhanced Rule 605 disclosures. Overall, Schwab's fundamentals are improving, but investors must critically assess the acquisition's value and regulatory impacts.

Implication

The strong Q3 performance reinforces Schwab's rebound in net interest income and cost efficiency, supporting the BUY thesis from the DeepValue report. However, the Forge Global acquisition introduces integration risks and may dilute focus from core regulatory challenges, such as tick-size changes affecting routing economics. While preferred dividends are well-covered, common equity investors face valuation concerns at ~23x P/E, with growth dependent on successful platform expansion and stable deposit funding. Regulatory modernization through 2026 could pressure margins, but Schwab's scale may provide a defensive advantage if execution quality improves. Ultimately, monitoring client asset growth, deposit betas, and acquisition synergies is critical to validate the bullish stance amid competitive and macro headwinds.

Thesis delta

The acquisition of Forge Global adds a potential growth catalyst in private markets, but it does not fundamentally shift the core thesis of scale advantages and regulatory tailwinds. Instead, it reinforces the strategic expansion narrative, though investors must watch for integration costs and whether it diverts resources from addressing regulatory risks. Key risks around order-routing economics and deposit sensitivity remain unchanged, requiring continued vigilance.