The Goldman Sachs Group, Inc. GS, which released its third-quarter 2024 results on Oct. 15, 2024, registered solid growth in its investment banking (IB) business. Driven by a robust performance, the company’s profits jumped 56% in the first nine months of 2024.
With the strong quarterly results, GS refocused on its core strengths of IB and trading operations while scaling back its consumer banking footprint, which is encouraging.
Let us determine whether now is the right time to buy Goldman Sachs’ shares or wait for a better entry point.
What’s Driving GS Stock?
Refocus on Wall Street Operations: Goldman Sachs is refocusing on its core strengths of IB and trading operations. In doing so, the company is moving away from consumer business.
This month, Barclays finalized a deal to acquire Goldman Sachs’ GM credit card business. Barclays will obtain the card program’s receivables from Goldman Sachs next year. Terms of the deal have not been disclosed.
Also, Apple has proposed to Goldman Sachs to cease their credit card and savings account arrangement within the next 12-15 months. On Wednesday, a federal regulator ordered Apple and Goldman Sachs to pay a combined $89-million penalty for defrauding customers and mishandling transaction complaints involving Apple Card holders.
However, Goldman Sachs' consistent efforts to narrow its focus on the consumer business are hurting its bottom line in the near term. Year to date, the company recorded a $597-million charge related to the GM credit card portfolio.
In the first quarter of 2024, GS completed the sale of GreenSky, its home-improvement lending platform. In the fourth quarter of 2023, it sold its Personal Financial Management unit.
Goldman Sachs aims to cease unsecured loan offerings to consumers through its digital consumer banking platform — Marcus. In 2023, it sold substantially all of Marcus’s loan portfolio.
With these initiatives, the corporation is focusing on investments, banking and other market-related activities.
The company’s focus on its Wall Street operations is paying off. In 2022 and 2023, its IB revenues declined 47.9% and 15.5% year over year, respectively. However, in the first nine months of 2024, the metric jumped nearly 24% from the first nine months of 2023. The upside was driven by the bounce back in global mergers and acquisitions (M&As), which led to a substantial improvement in the industry-wide deal value and volume.
At the 2024 Barclays conference, CEO David Solomon stated that IB continued to improve, even though activity from financial sponsors did not rebound as much as expected. Per Solomon, the firm expects private equity-led deals to bounce back at the end of this year and in 2025.
The company maintains its long-standing rank of number one in announced and completed M&As. A solid financial performance of buoyant equity markets and rate cuts this year, along with Goldman Sachs' leadership position, lent it an edge over its peers.
Lower Stress Capital Buffer (SCB) Requirement: GS came out as a winner after challenging the Federal Reserve to reduce its capital requirements over its June annual stress test results, initially forcing this investment bank to hold a higher amount of capital.
The central bank lowered the extra capital level requirement of Goldman. The bank now must hold a ‘stress capital buffer’ of 6.2%, down from the 6.4% suggested initially in the test.
With this, GS will be required to hold common equity equal to 13.7% of its risk-weighted assets instead of the 13.9% the Fed initially advised. As GS’s capital requirement lowers, the bank can utilize this to increase capital distributions and buyback plans.
The company rewards its shareholders handsomely. In July 2024, it increased its common stock dividend by 9.1% to $3 per share. In the past five years, GS hiked dividends four times, with an annualized growth rate of 24.80%. Currently, its payout ratio sits at 35% of earnings.
The company also has a strong liquidity position. As of Sept. 30, 2024, cash and cash equivalents were $155 billion. As of the same date, $75 billion were near-term borrowings.
Expansion in Private Equity Credit Line: Goldman plans to ramp up its lending services to private equity and asset managers, and intends to expand internationally.
The private equity market has a strong growth potential as private equity deals are expected to rise, driven by record-high fundraising. These loans are classified as short-term, typically secured by the assets of borrowing firms. These have a lesser risk attached to them. The firm’s focus on the private equity market is a strategic fit.
Goldman Sachs Asset Management, a unit of GS, intends to expand its private credit portfolio to $300 billion in five years from the current $130 billion. Once the company strengthens its operations in the United States, it plans to expand its lending business in Europe, the U.K. and Asia.
Goldman’s Estimates Favorable
The GS stock is expected to deliver strong results for 2024 and 2025.
Sales Estimates
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Earnings Estimates
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Find the latest earnings estimates and surprises on Zacks Earnings Calendar.
Goldman’s Valuation Stretched
From a valuation standpoint, the company appears somewhat expensive relative to the industry. It is currently trading at a forward 12-month Price-to-Earnings (P/E) multiple of 14.28X, above the industry average of 13.38X.
GS’s peers JPMorgan JPM has a P/E multiple of 13.30X, whereas Morgan Stanley MS has a P/E multiple of 15.63X.
Price-to-Earnings F12M
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What Should Investors Do About GS Stock?
Shares of Goldman have appreciated 37.2% compared with the S&P 500 Index’s growth of 23.3% and the industry’s rally of 75.4% in the year-to-date period. GS has outperformed its peers JPM and MS in the same time frame.
Price Performance
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Technical indicators suggest a continued strong performance for GS. The stock trades above its 50-day moving averages, signaling robust upward momentum and price stability. This technical strength underscores positive market sentiment and confidence in the company's financial health and prospects.
50-Day Moving Average
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The company’s efforts to refocus on core capital markets business and expansion in private credit lines provide a solid base for growth. GS's leadership position in announced and completed M&As gives it an edge over its peers.
Lower SCB requirements will help GS increase its capital distribution activities, boosting investor confidence in the stock. The company’s strong balance sheet positions it well for growth.
Given its strong long-term prospects, investors might consider investing in Goldman’s stock. GS currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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The Goldman Sachs Group, Inc. (GS) : Free Stock Analysis Report
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Morgan Stanley (MS) : Free Stock Analysis Report
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