Commonwealth Bank of Australia (ASX: CBA) shares have been riding high over the past 12 months. During this time, the banking major's stock price is up 31.5% trading at $133.5 per share at the time of writing.
This is a 20% advantage over the S&P/ASX 200 Index (ASX: XJO) over the past year. The chart below shows that the trend took off around November.
However, some brokers believe the good times for CBA shares may be nearing an end, projecting a sharp decline in market value. Let's dive into the details.
Image source: Getty Images
Are CBA shares overvalued?
Despite touching record highs of $133.5 today, E&P Financial Group thinks the stock is now fully valued.
Analyst Azib Khan reiterated his negative sentiment on CBA shares, noting the company might be "priced for over-perfection". According to The Australian, Kahn said:
While the Australian major banks are generally priced for perfection, CBA is priced for over-perfection.
While we do not expect anything untoward in the upcoming result (14 August) to trigger a de-rate – particularly if CBA opts to release credit loss provisions – we see business lending asset quality risks building on the horizon.
CBA currently trades on a price-to-earnings ratio (P/E) of 22.8 times, meaning investors are paying nearly $23 for every $1 of the bank's earnings.
In comparison, the P/E ratio for the iShares Core S&P/ASX 200 ETF (ASX: IOZ), which tracks the benchmark index, is 18.7 times. CBA shares trade at a premium to the benchmark.
Another concern of Kahn's is CBA's lower dividend yield, which is "the only one below the cash rate" among the major banks.
The analyst set a target price of just $80 for CBA shares, implying an eye-watering 40% downside potential from the current price of $133.5.
What are other analysts saying?
It's not just E&P that's bearish on CBA shares. The consensus of analyst estimates rates it a sell, too, according to CommSec.
Bell Potter has a sell rating on CBA shares due to its high valuation relative to growth potential. According to my colleague Kate, the broker suggests investors consider taking profits. It cited limited growth prospects in a competitive banking sector.
L1 Capital also signalled CBA's expensive valuation and lack of earnings growth in its June investment letter, indicating that the current price may not be justified by the fundamentals.
The bank's reported net profit after tax (NPAT) of $5 billion was down 3% year over year in H1 FY24. Moreover, according to S&P Capital IQ, analysts expect earnings-per-share (EPS) to grow by just circa 1% per year from $5.76 to $5.91 by FY26.
Meanwhile, Goldman Sachs reiterated its sell thesis on CBA shares in a June note. Again, valuation was the cause for concern. Analysts at Goldman Sachs wrote:
We are Sell-rated on CBA given: While CBA's volume momentum in housing lending has improved and BDDs charges remain benign, we don't think this justifies the extent of CBA's valuation premium to peers.
Foolish takeaway – what should investors do?
While CBA has delivered strong returns, its high valuation is raising concerns among the experts. Analysts from multiple firms suggest that CBA shares might be overvalued at current levels.
However, I'd point out that similar concerns were raised a year ago, and CBA still delivered substantial gains. Whether or not the fun is over depends on CBA's fundamentals and the market's overall sentiment.
Remember that past performance is never a predictor of future results, and conduct your own due diligence.
