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Proprietary Data Insights Financial Pros Investment Bank Stock Searches in the Last Month
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Should Investors Avoid Goldman Sachs? |
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Goldman Sachs (GS) CEO David Solomon moonlights as a DJ. But when the company reported Q4 earnings on January 17, it wasn’t music to investors’ ears. GS missed profit estimates. It ranked third among financial pros’ top five investment bank stock searches, according to our proprietary Trackstar database, but it was last among those stocks’ post-earnings performance. With its worst earnings miss in a decade, shares plunged more than 8% at their low the following day. Historically, Goldman has been a winner. It’s returned more than 187% in the last 10 years. But financial pros are taking a hard look at the stock after its recent dip. Today, we are too. Goldman Sachs’ Business Goldman Sachs specializes in investment banking, consumer banking, 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. Its greatest source of revenue is fixed income, currency, and commodities (FICC). Source: Goldman Sachs During Q4 2022, global banking and markets represented 61% of the firm’s net revenues, followed by asset and wealth management at 33%. Compared to Q4 2021, investment banking revenues fell 48% due to lower revenues from underwriting and advising. GS’ FICC revenues rose 44% compared to Q4 2021. The company attributes that to higher net revenues from interest-rate products, currencies, commodities, and credit products. The equities department lost 5%, as the firm collected less in investment banking fees. In addition, it had lower net gains from investments in equities and net markdowns on acquisition-financing activities. Goldman ranks number #1 in investment banking and global markets in terms of total deal size and participation. But the firm’s wealth management division’s net revenues fell 27%. GS planned to build a full-scale direct-to-consumer digital bank through its Marcus business. But Solomon recently announced the company would stop making new personal loans under the brand and postpone launching a checking product. The firm lost $3.0 billion in about three years on its platform solutions business, which includes transaction banking, credit cards, and fintech. The company disclosed that this business suffered a pre-tax loss of $1.2 billion in the first nine months of 2022. Before Q4 earnings, GS had nine straight quarters of double-digit returns. Now, in light of its disappointing Q4 results, the firm announced it would lay off 3,000 employees. Financials Source: Stock Analysis GS’ revenues popped from $44.5 billion in 2020 to a record-high $59.3 billion in 2021. The firm fell short of this number last year, closing out 2022 with $49.5 billion in revenues. The company’s asset- and wealth-management revenues dropped 39% last year. Equity underwriting revenues sank 83%, and debt underwriting revenues fell 48%. The firm lost 48% in investment banking fees. While the declines may sound staggering, we’re comparing them to the company’s best year in terms of revenues, so take them with a grain of salt. GS called Q4 an outlier. It’s reorganizing to focus on its strengths and less on its consumer business. It’s also reducing staff in areas of the business that weren’t yielding. The firm has $543 billion in cash and $463 billion in debt. Its current ratio of 2.4x is healthy. GS pays an annual dividend of $10 per share, currently yielding 2.85%. Valuation Source: Seeking Alpha GS has a P/E GAAP ratio of 11.6x, which is slightly above its five-year average of 11.4x. This puts it in a better position than Morgan Stanley (MS) at 15.7x, but it’s higher than Citigroup (C) at 7.0x, Deutsche Bank (DB) at 8.4x, and JPMorgan Chase (JPM) at 11.3x. GS’ price-to-sales ratio of 2.8x is more competitive than MS’ 3.0x and JPM’s 3.3x, but not as favorable as C’s 1.4x and DB’s 1.1x. One metric that stands out for Goldman compared to its peers is its price-to-cash-flow ratio of 2.5x. That’s significantly lower than MS at 20.3x and JPM at 4.4x. But neither C nor DB generated net cash flow (a metric banks use in place of operating cash flow) last year. Profitability Source: Seeking Alpha GS boasts a net income margin of 25.2%, down notably from last quarter’s 29.3%. But it’s still stronger than peers MS at 20.6%, C at 21.0%, and DB at 15.0%. JPM generates the highest net income margin at 30.8%. Meanwhile, Goldman’s return on equity has declined from last quarter, going from 12.2% to 9.9%. That’s comparatively worse than MS at 10.7% and JPM at 12.9%, but better than C at 7.5% and DB at 5.9%. GS did boost its net cash flow from $1.1 billion last quarter to $48.6 billion in Q4. That’s notably higher than MS at $7.9 billion, C at -$2.1 billion, and DB at -$21.2 billion. But none of them can touch JPM at $90.9 billion. Growth Source: Seeking Alpha After a record year of revenue growth in 2021, GS took a step back in 2022, as revenue growth fell 24.3% YoY. Revenue growth declined across the sector. MS’ was down -10.2%, JBM -6.6%, and C -6.0%. Only DB bucked the trend with a bump of 3.6%. Our Opinion 6/10 Falling revenues in underwriting, asset management, and equities don’t sound like a train we want to be on. Plus, Goldman needs to decide what to do with its consumer banking business. We believe it’ll take the firm a few quarters to see its adjustments pay off. It’s a good company, but it’s facing a rough time. GS currently trades above $349. We’d buy on dips into the $280-to-$300 range. |
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