Can the Smartest Guys in the Room Recover?

Goldman Sachs (GS) has a reputation for being one of the smartest investment banks on Wall Street. 

It’s number #1 in the category and #1 in global markets. It’s also financial pros’ third-most searched investment bank over the last month. 

Generally, when it enters a market, it conquers it. So many thought that would happen when it entered the consumer banking business in 2016. 

But the firm failed to meaningfully grow revenues and is now pivoting away from that side of the business. 

As the company returns to its bread and butter, is it a good time to buy its stock?

Goldman Sachs’ Business

Goldman Sachs specializes in investment banking, consumer and wealth management, global markets, and asset management. The firm ranks #1 in announced and completed mergers and acquisitions. 

It makes most of its revenues from global markets, with fixed income, currency, and commodities (FICC) its greatest source of revenue. 

During Q3 2022, global markets represented 52% of the firm’s net revenues. 

In fact, FICC jumped 41% from Q3 2021. The company attributes that to higher net revenues in interest-rate products and currencies and higher revenues in commodities and credit products. 

While its wealth management division has been flat over the last year, its consumer banking division has nearly doubled its revenues. Still, consumer banking remains a small part of the company’s overall revenues. 

Overall, this has helped balance the company because its asset management division struggled due to weakness in the stock market. 

GS once had plans to build a full-scale digital bank through its Marcus business. However, its CEO recently announced that the company would pivot away from being a major player in the consumer banking space, as it has found it challenging to scale. 

The firm launched its consumer banking division in 2016, but Wall Street has viewed this division as a failure. 

Financials

GS’ revenues popped from 2020 to 2021, going from $44.5 billion to $59.3 billion. The firm’s 12-month trailing revenues are currently $47 billion. 

The company’s investment banking division has been hurt the most, as its revenues dropped 57% lower than in Q3 2021 due to a significant drop in equity and debt underwriting.

But the firm is in a strong financial position heading into a possible recession. It has $668 billion in total cash and $511 billion in total debt. 

Moreover, it has a healthy current ratio of 2.47x. It pays an annual dividend of $10 per share, a yield of 2.97%. 

Valuation

GS trades at a P/E GAAP ratio of 8.9x, notably lower than its five-year average of 11.7x. That 8.9x is better than Morgan Stanley (MS) at 11.7x and JPMorgan Chase (JPM) at 10.4x. But it’s not as low as Citigroup (C) at 6.1x or Deutsche Bank (DB) at 7.5x. Yet both of those companies are exposed to problematic international risks.

GS has a price-to-sales ratio of 2.4x, lower than MS at 2.5x and JPM at 3x, but not as low as C at 1.2x and DB at 0.7x. 

It’s worth noting that GS has a significantly larger market cap than DB, almost 10x the size. 

Profitability

GS has a net income margin of 29.3%, which tops its competitors, except for JPM, which is at 30.7%.

Additionally, the company boasts an impressive return on equity of 12.2%, which is in line with MS at 12.9% and JPM at 12.8%. DB and C are notably lower at 4.7% and 7.8%.

While GS does generate free cash flow – $1.1 billion – it’s not as high as its competitors’. MS generates $17.6 billion, JPM $132 billion, and C $34.4 billion. Of course, things could be worse. DB is at -$21.2 billion. 

Growth

After a record year of revenue growth in 2021, GS has taken a step back in 2022. Revenue growth has declined by 18% YoY. This is largely due to weakness in the equity market and underwriting. 

However, its competitors have also experienced declines in revenue growth, except for DB, which saw revenue growth improve by 3.7% YoY. 

Our Opinion 6/10

A weaker economy certainly hurts some aspects of Goldman’s business, as we see in its declining revenues in underwriting, asset management, and equities. GS shares are down nearly 12% YTD, and it’s trading at a relatively low P/E ratio. 

While we believe it’s a strong company and a good stock, it’s better to buy if the price dips back down to the $270–$290 range.

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