Capital One delivered a strong quarter. Why we're not declaring victory just yet

Capital One is finally getting credit for a solid quarter, but the debate surrounding the credit card giant's stock is far from settled. Shares of Capital One jumped roughly 4% on Wednesday after the company delivered better-than-expected third-quarter results , supported by resilient consumer credit, progress integrating Discover, and stronger net interest income (NII) — the difference between what a bank makes on loans, like credit card interest in the case of Capital One, and what pays out on deposits. The rally was welcome news for a stock that has struggled — down 13.5% year to date. The quarterly results and post-earnings conference call commentary Tuesday evening offered a clearer picture of Capital One's earnings potential. But they didn't resolve one of our biggest concerns: elevated spending. While a bit lighter than expected, total company marketing expense did rise 14% year-over-year to $1.6 billion. Management expects marketing costs to increase sequentially from the third quarter to the fourth quarter at a similar growth rate of 35.7% during the same quarter-over-quarter period last year — primarily driven by seasonality. On the call, CEO Richard Fairbank said Capital One plans to "lean harder" into marketing in 2027 as it pursues growth in premium credit cards, national banking, and the Discover franchise. The company did not disclose a marketing expense estimate for next year. "Our biggest competitors continue to invest heavily in marketing, and we need to be at the top of our game," the CEO added. It's a strategy we understand and recently wrote about : Capital One is investing to attract more affluent, high-spending customers. Those investments could create more profitable customer relationships over time, but they come at a near-term cost. Bank of America analysts said in a note Wednesday to clients that "the spend is right for the franchise, but with no efficiency guidance, COF [Capital One] must show it does not erode the earnings power it has just revealed." Deutsche Bank echoed those concerns, lowering its 2027 earnings estimate to $22.25 per share from $22.50 due to anticipated marketing spending. That uncertainty was a major reason we trimmed our Capital One position Tuesday ahead of earnings and downgraded the stock to our hold-equivalent 2 rating . The sale wasn't a prediction about the quarter but rather a reflection of our frustration with how much upfront spending has been required to unlock growth from the Discover and Brex acquisitions. "Expenses have been part of the issue that's been hanging over the stock for the past year," portfolio analyst Jeff Marks said during Wednesday's Morning Meeting . In light of the rally, he added that Tuesday's trim was a bit ill-timed. However, a profit is still a profit. The sale represented a roughly 13% gain on Capital One stock purchased in March 2025. COF YTD mountain Capital One YTD The good news is that the Discover integration is progressing faster than expected. Capital One has achieved roughly $1.8 billion in annualized synergies, with the benefits of moving debit transactions onto its own payment network and eliminating overlapping costs becoming increasingly apparent. The target at the time the $35 billion Discover deal was announced in February 2024 was a combined $2.7 billion of synergies in 2027. "We're achieving the expected synergies ahead of schedule," Fairbank said. "We have talked for a while now about the earnings power on the other side of integration. You can squint your eyes and see it now in the first three quarters of 2026." Discover card originations also increased year over year for the first time since the deal closed, while Capital One's swipe-fee revenue continued to climb. Owning the Discover payment network allows the company to collect more of the fees merchants pay when customers use their cards — like American Express , which issues cards and owns its payment network. There is one new complication. Capital One expects to lose some swipe-fee revenue if a proposed Visa and Mastercard settlement with merchants receives final approval. Visa and Mastercard do not issue credit cards. They provide the payment rails. Banks — like Amex, Capital One, Citigroup , and many others — are the ones issuing the cards. Capital One management said that headwind would roughly offset the remaining Discover synergies. Morgan Stanley said in a Wednesday note that the potential loss of roughly $700 million in swipe-fee revenue "overshadowed" an otherwise strong quarter. Adjusted earnings of $6.69 per share easily beat the $5.50 consensus estimate, while revenue of $16.34 billion also topped expectations. Credit performance was particularly encouraging given concerns that elevated oil prices and inflation could pressure consumers. However, a $225 million reserve release helped boost earnings, meaning investors shouldn't expect that level of profitability every quarter. "We appreciate the solid results, but would not annualize a seasonally favorable quarter ahead of higher marketing and interchange pressure," Baird Equity Research said in a note to clients Wednesday. Despite the spending concerns, Capital One remains attractively valued at less than 9 times consensus 2027 earnings estimates. The company also repurchased another $2.6 billion in shares during the quarter, providing additional support for shareholders. "The main thing here is really it's cheap," Jeff said Wednesday. "There's a nice plan in place. Investing in growth. We'll never truly fault a company for wanting to invest in growth." Bottom line For now, we're holding on to our remaining shares, encouraged by the progress on Discover and resilient credit performance but mindful that higher spending could continue to constrain earnings growth. Capital One is getting closer to realizing the benefits of its transformative acquisition. The challenge going forward is making sure the cost of pursuing its next phase of growth doesn't overshadow the hard-fought gains the company has already made. (Jim Cramer's Charitable Trust is long COF. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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