Goldman Sachs Stock Has Limited Upside

[Updated 12/2/2020] Goldman Sachs Update

After a 72% gain since the March bottom, at the current price near $232 per share, we believe Goldman Sachs’ stock (NYSE: GS) has limited upside based on its historic P/E multiples. GS stock has increased from $135 to $232 off the recent bottom compared to the S&P 500 which increased almost 65%. The stock has already surpassed the level seen at the end of 2019 and is leading the broader market. This is because investors are cautiously positive about the rise in its Q2 and Q3 revenues – the top-line has increased 35% to a consolidated figure of $24.1 billion for the last 2 quarters, as compared to the figure of $17.8 billion a year ago.

The bank has seen significant revenue growth over the last two quarters that outperformed analysts’ profit estimates driven by stronger-than-expected results in sales & trading and investment banking segments. That said, this growth was mainly driven by higher trading volumes and a jump in debt origination deals due to the Covid-19 crisis. As the economy inches towards normalcy, we expect both the sales & trading and investment banking revenues to normalize in the coming months. In addition, Goldman Sachs’s P/E multiple changed from just below 7x in 2018 to close to 11x in 2019. The company’s current P/E is around 11x, which leaves a limited upside potential for the stock. Our dashboard Buy Or Sell Goldman Sachs Stock? provides the key numbers behind our thinking.

[Updated 9/08/2020] Up 50%, Goldman Sachs Stock Can Still Grow

After a 56% rally off the March bottom, Goldman Sachs’ stock (NYSE: GS) seems to still have some room to grow based on its historic P/E multiples. Goldman Sachs, a leading U.S investment bank with a global presence, has seen its stock rally from $135 to $211 off the recent bottom compared to the S&P which moved a similar 55%. The bank’s stock is closely following the broader markets as investors are positive about the strength of its Sales & Trading and investment banking operations. Notably, its Q2 2020 results saw a 41% y-o-y increase in revenues which was way ahead of market expectations, mainly driven by growth in trading and the investment banking business. Despite this, its stock is still 8% below the levels seen in late 2019. 

Goldman Sachs’ stock has partially reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. After the healthy rise since the March 23 lows, we feel that the company’s stock still has some potential as its revenues have benefited during the lockdown and its valuation implies it has further to go. 

Some of this rise of the last 3 years is justified by the roughly 19% growth seen in Goldman Sachs’s revenues over 2016 to 2019, which translated into an 11% increase in Net Income. The net income was unable to capitalize on the rise in revenues due to higher non-interest expenses – especially due to a jump in compensation cost, which weighed on the net income margin reducing it from 23.2% in 2016 to 21.65% in 2019. While the net income did suffer, the earnings figure increased by 28% over the same period, thanks to the bank’s regular investments in share repurchases.

While the company has seen steady revenue and earnings growth over recent years, its P/E multiple has actually decreased. We believe the stock is likely to see some upside despite the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard Why Goldman Sachs Stock was stagnant between 2016 and 2019 has the underlying numbers.

Goldman Sachs’s P/E multiple changed from close to 14x in 2016 to around 11x in 2019. While the company’s P/E is down to about 10x now, there is some upside potential when the current P/E is compared to levels seen in the past years – P/E of 11x at the end of 2019 and 14x as recent as late 2016.

So what’s the likely trigger and timing for further upside?

Goldman Sachs has a loan portfolio of around $89 billion (as per 2019 data), which could lead to substantial losses if consumer activity levels fall and the economic condition further worsens, leading to a rise in loan default rates. Not to forget, it would make it expensive for the bank to secure funding, impacting its overall operations. Similarly, its asset management business is likely to suffer due to economic slowdown which was also evident from the Q2 2020 results – segment revenues down by 18% y-o-y. However, there is a silver lining, both the investment banking and sales & trading businesses have seen significant growth over the first half of 2020. Fortunately for Goldman, it has a noteworthy presence in both segments, driving around 19% and 40% of the total revenues, respectively, (as per 2019 data). Given the level of volatility in equity & debt markets, the bank is well-positioned to report growth in its securities trading arm, coupled with higher investment banking revenues driven by growth in debt origination space. This, in turn, would offset the negative growth in other segments and benefit the revenue trajectory over the coming months. While Goldman Sachs’ results for Q2 saw unprecedented growth, we believe that Q3 results will also be positive.

Further, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again.  

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