Commonwealth Bank of Australia (ASX: CBA) shares have been one of the major performers this year and are up more than 34% at the time of writing.
The stock touched fresh highs in Monday's session, having rallied more than 10% in the past month of trade alone.
For the first time in history, the stock has nudged past the $150 per share barrier – nothing short of a feat in the eyes of many.
But has this rally overextended, and are shares now ridiculously overpriced? Here's what the experts say.
What's driving CBA shares higher?
Let's examine the numbers. Commonwealth Bank recently reported a net profit of $9.5 billion for FY24, down 6% from the previous year. Its net interest margin dipped by 8 basis points.
Despite these less-than-stellar figures, CBA shares have climbed from $102 in November 2023 to today's lofty heights.
This comes as bank stocks, along with the broader market, have rallied this year.
This meteoric rise has pushed the bank's price-to-earnings (P/E) ratio above 25—a level you'd expect from a high-flying tech startup, not a stalwart bank.
Historically, CBA's average annual P/E ratio has been under 20 over the past decade, according to my colleague Tristan.
As such, the stock is trading at an expensive P/E ratio relative to history.
Are investors paying too much?
The key question is whether CBA shares justify this premium valuation. Brokers are currently split on the matter.
UBS forecasts the bank's net profit to rise to $10 billion in FY25, translating to earnings of nearly $6 per share.
However, investors need to decide if this P/E ratio is appealing. Philippe Bui of Medallion Financial Group says shares may be pricey at this level, especially when put up against the value on offer. Speaking to The Bull:
The company was recently trading on a lofty price/earnings ratio above 25, and has benefited from a higher interest rate environment.
However, a fiercely competitive mortgage and loan environment make it hard for us to see a compelling case for CBA at these levels. Investors may want to consider cashing in some gains.
But that's not to say investors will completely shut off the buying. If they are willing, able, and prepared to pay a 25 times multiple or more, they will.
And if these valuations are based on expectations – which they are – and if the bank meets or exceeds these expectations, it may carry higher share prices. The opposite is also abundantly true.
Meanwhile, there's also the fact that super funds will likely continue buying companies like Commonwealth Bank given their heavy weighting in Australia's stock market indexes.
My colleague Seb wrote extensively about this in a recent analysis. These funds could keep CBA shares buoyant.
These big players aren't necessarily looking for bargains; they're following mandates that require them to hold a certain proportion of ASX heavyweights like Commonwealth Bank.
Foolish takeout
CBA shares at their current levels do seem stretched, but there's more to the story. One has to benchmark price against value. For some experts, the high P/E ratio, modest profit growth, and shrinking dividend yield suggest that the stock might be overpriced.
For others, the prospect of earnings growth continues to justify the premiums. Time will tell who is correct.
In the last 12 months, CBA shares have rallied 48%.
