After discover acquisition, is Capital One stock a buy?

The bank easily beat earnings estimates in the first quarter after buying Discover.

In its first quarter after finalizing its acquisition of Discover Financial, Capital One Financial (NYSE: COF) reported strong earnings results.

The acquisition of Discover added some $160 billion to Capital One’s asset under management, vaulting it to the sixth largest bank in the U.S., up from No. 9. It had about $659 billion in assets as of June 30, just behind the fifth largest bank, US Bancorp (NYSE: USB) at $680 billion.

“We completed our acquisition of Discover on May 18th. We’re fully mobilized and hard at work on integration which is going well,” Richard Fairbank, founder, chairman, and CEO of Capital One, said. “We’re as excited as ever by the expanding set of opportunities to grow and create value as a combined company.”

With the combined revenue of the two banks, Capital One saw revenue increase 25% in the quarter to $12.5 billion, but that fell short of estimates of $12.9 billion. Net interest income also rose 25% to around $10 billion.

Also, the company had a net loss of $4.3 billion in the quarter, down from a $597 million net gain in Q2 of 2024. The loss was mainly due to costs associated with the acquisition and more set aside for credit losses, given the higher asset totals. On an adjusted basis, Capital One reported net income of $2.8 billion, which was up some 133% from the same quarter a year ago and 75% than Q1.

The adjusted EPS of $5.48 per share was 75% higher than Q2 of 2024 and 35% higher than the first quarter. It also dwarfed estimates of $3.72 per share.

Credit card loans soar

Discover, when acquired, was one of just four credit and payment networks, along with Visa, Mastercard, and American Express.

Capital One is currently one of the top five credit card issuers, meaning they issue the credit cards and lend the money for purchases. But they didn’t have the network on which to process the transactions — until now.

In the latest quarter, Discover helped boost Capital One’s credit card loans by 72% to $270 billion. That also had the effect of spiking net interest income by 25% to around $10 billion.

But it also led to higher noninterest income for Capital One through discount and interchange fees – which are essentially swipe fee when the cards are used on the Discover network. Discount and interchange fees rose 21% to $1.5 billion while service charges and related fees increased 29% to $658 million.

While provisions for credit losses rose 50% due to the higher asset levels, the overall credit quality improved with net charge offs and loan delinquency rates dropping year-over-year.

What happens next?

This is just the beginning of a multi-year integration project, but the company is already moving some of its cards on to the Discover network, mainly its debit cards. Fairbank said the company expects most debit cards to be moved to the Discover network by early 2026.

Currently, Capital One, as an issuer, has Mastercard and Visa branded cards, using their networks. But now, as the owner of the Discover network, it can generate more interchange or swipe fee revenue using its own network. However, it will still utilize the Visa and Mastercard networks, at least for the foreseeable future.

Capital One historically has not provided regular guidance, and they didn’t here after the Discover acquisition.

Capital One stock was up almost 2% on Wednesday to $221 per share. It has returned roughly 52% over the past 12 months. It has also been a good long-term performer with an average annualized return of 28% over the past five years and 9% over the past 10 years.

The stock did get one notable price target upgrade post earnings, as RBC raised the target by $15 to $255 per share. Capital One has a median price target of $251.50 per share, which would indicate 14% upside from the current price.

With such a massive integration, there is a lot of restructuring and expense management that needs to occur. But the promise of gaining market share in the credit card and payment space and expanding its banking footprint makes this a very intriguing stock. Its made even more attractive by its low valuation, trading at 14 times earnings.

Since the stock has been on a good run, it might make sense to sit back another quarter and let things settle a bit before jumping in.