I asked ChatGPT for a discounted cash flow analysis for Lloyds shares. This is what it said…
Lloyds Banking Group (LSE:LLOY) shares have soared over 70% since the start of 2025. Today (15 December), they’re changing hands for around 95p and all eyes appear to be focused on whether they can break the 100p barrier. Based on forecast earnings for 2025, they’re now the most expensive of the FTSE 100âs five banks.
But this doesnât necessarily mean they’re over-priced. Letâs use the helping hand of artificial intelligence (AI) to try and find out.
Quick maths
One of the most common techniques employed to assess a companyâs valuation is a discounted cash flow (DCF) forecast. This looks at the future estimated cash generation of a business and then, by applying a discount rate (9% in this case), estimates what a company should be worth in todayâs money.
I asked ChatGPT to do the number crunching for me. However, before giving me the answer, the software warned that the cash flows of Lloyds can be âvolatileâ as its earnings are dependent upon interest rates, capital requirements and loan defaults.
It therefore proposed an approach based on earnings and dividends instead of “pure free cash flow“, which takes into account an estimate of the bankâs future profit (not cash) and returns to shareholders.
So what figure did it come up with?
The final answer
Interestingly, it gave a range of 90p-110p. On this basis, it reckons the bankâs stock price is ânot obviously crazyâ but not âsuper cheapâ either.
The trouble with calculations like these is that the results are highly sensitive to the assumptions made. For example, changing the discount rate will lead to a different result. However, taking it at face value, I was a little surprised. Iâve long believed that the bankâs being overvalued by investors.
Iâve previously written that its almost total reliance on the UK economy makes me a little nervous. Indeed, last week (12 December), it was revealed â to the surprise of most economists — that GDP contracted in October. A weak economy increases the likelihood of bad loans and reduces the level of potential new business.
Being honest, I donât think the bankâs earnings are going to grow at a rate implied by its current share price or in line with analystsâ forecasts. And as impressive as AI software can be, I donât think itâs a substitute for human-based research.
Something else
But as an alternative to Lloyds, I think HSBC‘s (LSE:HSBA) worth considering. Although itâs exposed to the same industry risks â the potential for loan defaults and an economic slowdown — these are spread over a far larger geographical footprint. Hong Kong and the UK remain its two largest markets, but with 41m customers in 57 countries, itâs not totally reliant on one particular jurisdiction.
It also has the financial firepower to cope better than most with an uncertain world. Its balance sheet shows $3.2trn of assets including nearly $1trn of loans.
Also, based on forecast earnings for 2025, it has a lower price-to-earnings ratio (12.7) than Lloyds (14.2). Its dividend is also more generous. On this basis, I think HSBC offers better value than its British rival.
The post I asked ChatGPT for a discounted cash flow analysis for Lloyds shares. This is what it said… appeared first on The Motley Fool UK.
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HSBC Holdings is an advertising partner of Motley Fool Money. James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
