• Investors may be wondering whether Wells Fargo at around US$83.73 is offering good value right now, or if the easy money has already been made.
• The stock has returned 2.2% over the past week and 13.9% over the past month, while year to date it is down 12.0%. It sits on a 1 year return of 18.3%, a 3 year return of 113.9% and a 5 year return of 126.2%.
• Recent headlines have focused on Wells Fargo's ongoing efforts to strengthen its franchise and address past regulatory and operational issues, alongside commentary on its position among large U.S. banks. This backdrop helps frame how investors are currently thinking about both its risks and its potential.
• Simply Wall St's valuation model currently gives Wells Fargo a score of 4/6. This score will be unpacked using several valuation approaches, and later the article will look at a more holistic way to judge whether that score really tells the full story.

Approach 1: Wells Fargo Excess Returns Analysis

The Excess Returns model looks at how much value Wells Fargo can create over and above the return that equity investors require, and then capitalizes those surplus returns into an intrinsic value per share.

For Wells Fargo, the starting point is its Book Value of $53.21 per share and an Average Return on Equity of 13.35%. Based on analyst inputs, the model uses a Stable EPS of $7.98 per share, sourced from weighted future Return on Equity estimates from 17 analysts. The required return for shareholders, or Cost of Equity, is $4.79 per share, so the Excess Return is $3.19 per share.

These excess returns are projected on a Stable Book Value of $59.79 per share, which comes from weighted future Book Value estimates from 14 analysts, and then discounted back to today. This produces an intrinsic value estimate of about $131.14 per share.

Compared with the current share price of around $83.73, the model implies an intrinsic discount of 36.2%, which points to Wells Fargo stock trading at a substantial discount to this Excess Returns estimate.

Result: UNDERVALUED

Our Excess Returns analysis suggests Wells Fargo is undervalued by 36.2%. Track this in your watchlist or portfolio, or discover 44 more high quality undervalued stocks.

Approach 2: Wells Fargo Price vs Earnings

For a profitable company like Wells Fargo, the P/E ratio is a useful shorthand for what investors are currently willing to pay for each dollar of earnings. It helps you compare the stock with other banks and with its own earnings power.

What counts as a “normal” P/E depends on how the market views a company’s growth prospects and risk. Higher expected growth or lower perceived risk can justify a higher P/E, while slower growth or higher risk usually points to a lower multiple.

Wells Fargo currently trades on a P/E of 12.40x, compared with an industry average for banks of about 11.84x and a peer average of 13.91x. Simply Wall St’s Fair Ratio for Wells Fargo is 14.18x. This Fair Ratio is a proprietary estimate of what the P/E might be, given factors such as the company’s earnings profile, its industry, profit margins, market capitalization and specific risks.

Because the Fair Ratio incorporates these company specific drivers, it offers a more tailored reference point than simple peer or industry comparisons. With the Fair Ratio above the current P/E, this approach points to Wells Fargo trading below that Fair Ratio benchmark.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Wells Fargo Narrative

Earlier it was mentioned that there is an even better way to understand valuation, so Narratives are introduced here as simple stories you create about Wells Fargo that connect your view of its business to a financial forecast and, ultimately, to a fair value you can compare with the current share price.

On Simply Wall St's Community page, Narratives let you spell out how you think Wells Fargo's revenue, earnings and margins might evolve, and then link those assumptions to a fair value that moves in real time when new information like earnings or news hits.

For example, one investor might build a Wells Fargo Narrative that looks closer to the bullish analyst view, with a fair value near US$113.00. Another might align with the more cautious view around US$85.00, and both can then see at a glance whether the current price of about US$83.73 looks above or below their own fair value line.

Do you think there's more to the story for Wells Fargo? Head over to our Community to see what others are saying!

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.