Thematic evaluation
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The Goldman Sachs Group, Inc. (GS)

October 08, 2024

Compared to: Morgan Stanley (MS) | JPMorgan Chase & Co. (JPM) | Financial Select Sector SPDR Fund (XLF)

Our reasoning

Goldman Sachs appears moderately overvalued based on its high P/E ratio (57.38) compared to industry averages and historical norms. While the company has strong growth prospects and a solid market position, the current valuation seems to price in an optimistic scenario, potentially underestimating risks such as regulatory changes and legal proceedings. The below-target ROE and increasing debt levels further support this assessment.

Key takeaways
  • Goldman Sachs is experiencing strong revenue growth, driven by increases in both interest income and non-interest income.
  • The company is focused on growing its more durable revenue streams, including financing activities, management and other fees, and private banking and lending.
  • Goldman Sachs is experiencing strong overall profitability, as evidenced by the increasing net income.
  • The company's profitability is below the industry average, as indicated by the low return on assets and return on equity ratios.
  • Goldman Sachs' cash flow generation is strong, as evidenced by the increasing free cash flow.
  • The company's capital allocation strategy appears to be focused on shareholder returns, as evidenced by the increasing trend in cash dividends paid.
  • Goldman Sachs' liquidity position appears to be stable, with a current ratio above 1. However, the decreasing trend in cash could be a concern if it continues.
  • Goldman Sachs' solvency appears to be strong, with a high level of debt relative to equity. However, the increasing trend in debt could be a concern if it continues.
  • The firm is engaging with regulators regarding the increase in their stress capital buffer requirement, which they believe does not reflect the strategic evolution of their business.
  • Goldman Sachs' asset utilization efficiency is below the industry average, as indicated by the low return on assets and return on equity ratios.
  • The company is experiencing increasing operating expenses, which could be a concern if it continues.
  • The firm operates in a highly regulated industry and faces risks from changes in laws, rules, and regulations, as well as broader macroeconomic and market conditions.
  • The firm faces risks related to the COVID-19 pandemic, Russia's invasion of Ukraine, climate change, and potential changes to capital requirements and regulations.
  • The firm is involved in various legal proceedings, including investigations and lawsuits related to 1MDB, mortgage-backed securities, currencies, commodities, interest rate swaps, and other matters.
  • Goldman Sachs' future prospects are positive, driven by the growth in its more durable revenue streams and strong cash flow generation.
  • The company's financial flexibility could be impacted by the increasing debt levels. However, the strong earnings and cash flow generation should provide some cushion.
  • The firm is optimistic about the application of AI and the accelerating innovation in technology, which they believe will drive demand for infrastructure and financing.
Overvalued
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Evaluation summary

  1. Company Overview:

    • The Goldman Sachs Group, Inc. (GS) is a leading global financial institution that provides a wide range of financial services to a diverse client base, including corporations, financial institutions, governments, and individuals. GS operates in three main business segments: Global Banking & Markets, Asset & Wealth Management, and Platform Solutions.
    • GS's Global Banking & Markets segment offers investment banking, global investments, and equity and debt investments. The Asset & Wealth Management segment focuses on direct-to-consumer banking, including lending, deposit-taking, and investing. The Platform Solutions segment includes consumer platforms like partnerships offering credit cards and point-of-sale financing, and transaction banking.
    • GS's target market is broad, encompassing a wide range of clients across various industries and geographies. The firm leverages its global reach, expertise, and strong brand reputation to cater to the diverse needs of its clients.
    • For comparative analysis, we will be using the Financial Select Sector SPDR Fund (XLF) as a benchmark and JPMorgan Chase & Co. (JPM) and Morgan Stanley (MS) as industry peers.

  2. Financial Performance:

    • GS has demonstrated strong revenue growth in recent quarters, driven by increases in both interest income and non-interest income. The company's focus on growing its more durable revenue streams, including financing activities, management and other fees, and private banking and lending, has contributed to this growth.
    • GS's profitability has been strong, as evidenced by increasing net income. However, its profitability remains below the industry average, as indicated by the low return on assets (ROA) and return on equity (ROE) ratios.
    • GS's ROE, while improving, remains below their 15% target, which management attributed to lingering drag from enterprise platforms and activity levels still below 10-year averages.
    • Compared to its peers, GS has generally outperformed MS in terms of historical performance, particularly in the shorter timeframes. However, GS has underperformed JPM in the longer timeframes, indicating that JPM has been more consistent in generating returns over the long term.

  3. Operational Efficiency:

    • GS's asset utilization efficiency is below the industry average, as indicated by the low ROA and ROE ratios. The company is experiencing increasing operating expenses, which could be a concern if it continues.
    • GS's working capital management appears to be efficient, with a stable current ratio above 1. However, the decreasing trend in cash could be a concern if it continues.
    • GS's cash flow generation is strong, as evidenced by the increasing free cash flow. The company's capital allocation strategy appears to be focused on shareholder returns, as evidenced by the increasing trend in cash dividends paid.
    • GS's capital expenditure (CAPEX) has been relatively stable in recent quarters, while depreciation trends have been consistent. The firm's dividend and share repurchase sustainability appears to be strong, supported by its robust cash flow generation.
    • Compared to its peers, GS has a higher risk profile than JPM, but a similar risk profile to MS. GS has not been as efficient in generating risk-adjusted returns as JPM and MS.
    • GS's short-term liquidity position appears to be stable, with a current ratio above 1. However, the decreasing trend in cash could be a concern if it continues. GS's long-term liquidity position appears to be strong, with a high level of debt relative to equity. However, the increasing trend in debt could be a concern if it continues.

  4. Growth Opportunities:

    • GS is focused on growing its more durable revenue streams, including financing activities, management and other fees, and private banking and lending. The firm is committed to reducing its historical principal investment portfolio, with a target to sell down the vast majority by the end of 2025.
    • GS is optimistic about the application of AI and the accelerating innovation in technology, which they believe will drive demand for infrastructure and financing.
    • GS is engaging with regulators regarding the increase in their stress capital buffer requirement, which they believe does not reflect the strategic evolution of their business.
    • GS's management team has expressed confidence in the firm's ability to drive strong returns for shareholders while continuing to support clients.

  5. Risks and Threats:

    • GS operates in a highly regulated industry and faces risks from changes in laws, rules, and regulations, as well as broader macroeconomic and market conditions.
    • GS faces risks related to the COVID-19 pandemic, Russia's invasion of Ukraine, climate change, and potential changes to capital requirements and regulations.
    • GS is involved in various legal proceedings, including investigations and lawsuits related to 1MDB, mortgage-backed securities, currencies, commodities, interest rate swaps, and other matters.
    • GS faces competitive pressure from other large financial institutions, including JPM and MS.

  6. Valuation Analysis:

    • GS's valuation metrics, such as P/E and EV/EBITDA, are currently in line with its peers.
    • GS's valuation is expected to be driven by its strong earnings growth, robust cash flow generation, and strategic focus on growing its more durable revenue streams.

  7. Price Performance:

    • GS has generally outperformed XLF over the past three years, with notable periods of outperformance in the 6-month, 1-year, and 2-year periods. However, GS has underperformed XLF in the 1-month and 3-month periods. This suggests that GS's performance is not consistently better than XLF's, and its performance may be more sensitive to short-term market fluctuations.
    • GS has provided higher annualized returns than XLF over the past three years. However, GS has also been more volatile than XLF, as evidenced by its higher annualized volatility. GS has also experienced larger maximum drawdowns than XLF, indicating a higher risk profile.
    • GS's Sharpe Ratio has generally been lower than XLF's, suggesting that XLF has offered a better risk-adjusted return. This is consistent with the observation that GS has been more volatile than XLF, despite providing higher returns.

  8. Future Outlook:

    • GS's future prospects are positive, driven by the growth in its more durable revenue streams and strong cash flow generation.
    • The company's financial flexibility could be impacted by the increasing debt levels. However, the strong earnings and cash flow generation should provide some cushion.
    • GS is optimistic about the application of AI and the accelerating innovation in technology, which they believe will drive demand for infrastructure and financing.

  9. Summary:

    • GS is a leading global financial institution with a strong brand reputation and a diverse client base. The company has demonstrated strong revenue growth and profitability in recent quarters, driven by its focus on growing its more durable revenue streams.
    • GS's operational efficiency is below the industry average, as indicated by the low ROA and ROE ratios. However, the company's cash flow generation is strong, and its capital allocation strategy appears to be focused on shareholder returns.
    • GS faces risks from changes in laws, rules, and regulations, as well as broader macroeconomic and market conditions. However, the company's strong earnings and cash flow generation should provide some cushion.
    • GS's valuation metrics are currently in line with its peers. The company's future prospects are positive, driven by the growth in its more durable revenue streams and strong cash flow generation.
    • GS's price performance has been strong in the longer timeframes, but its performance has been more volatile than XLF.
    • Overall, GS appears to be a well-positioned financial institution with strong growth potential. However, investors should be aware of the company's high risk profile and the potential impact of regulatory changes and macroeconomic headwinds.
Peer fundamentals 
Fundamentals
Insights
  • Goldman Sachs is experiencing strong revenue growth, driven by increases in both interest income and non-interest income.
  • The company is focused on growing its more durable revenue streams, including financing activities, management and other fees, and private banking and lending.
  • Goldman Sachs is experiencing strong overall profitability, as evidenced by the increasing net income.
  • The company's profitability is below the industry average, as indicated by the low return on assets and return on equity ratios.
  • Goldman Sachs' cash flow generation is strong, as evidenced by the increasing free cash flow.
  • The company's capital allocation strategy appears to be focused on shareholder returns, as evidenced by the increasing trend in cash dividends paid.
  • Goldman Sachs' liquidity position appears to be stable, with a current ratio above 1. However, the decreasing trend in cash could be a concern if it continues.
  • Goldman Sachs' solvency appears to be strong, with a high level of debt relative to equity. However, the increasing trend in debt could be a concern if it continues.
  • The firm is engaging with regulators regarding the increase in their stress capital buffer requirement, which they believe does not reflect the strategic evolution of their business.
  • Goldman Sachs' asset utilization efficiency is below the industry average, as indicated by the low return on assets and return on equity ratios.
  • The company is experiencing increasing operating expenses, which could be a concern if it continues.
  • The firm operates in a highly regulated industry and faces risks from changes in laws, rules, and regulations, as well as broader macroeconomic and market conditions.
  • The firm faces risks related to the COVID-19 pandemic, Russia's invasion of Ukraine, climate change, and potential changes to capital requirements and regulations.
  • The firm is involved in various legal proceedings, including investigations and lawsuits related to 1MDB, mortgage-backed securities, currencies, commodities, interest rate swaps, and other matters.
  • Goldman Sachs' future prospects are positive, driven by the growth in its more durable revenue streams and strong cash flow generation.
  • The company's financial flexibility could be impacted by the increasing debt levels. However, the strong earnings and cash flow generation should provide some cushion.
  • The firm is optimistic about the application of AI and the accelerating innovation in technology, which they believe will drive demand for infrastructure and financing.
Analysis
  • Revenue - Goldman Sachs is experiencing strong revenue growth, driven by increases in both interest income and non-interest income. - The company is focused on growing its more durable revenue streams, including financing activities, management and other fees, and private banking and lending. - The firm is committed to reducing its historical principal investment portfolio, with a target to sell down the vast majority by the end of 2025.
    • Profitability
      • Goldman Sachs is experiencing strong overall profitability, as evidenced by the increasing net income.
      • The company's profitability is below the industry average, as indicated by the low return on assets and return on equity ratios.
      • The firm's ROE, while improving, remains below their 15% target, which management attributed to lingering drag from enterprise platforms and activity levels still below 10-year averages.
    • Liquidity
      • Goldman Sachs' liquidity position appears to be stable, with a current ratio above 1. However, the decreasing trend in cash could be a concern if it continues.
      • The company has strong financial flexibility for future investments or economic downturns, as evidenced by the increasing free cash flow generation.
    • Solvency
      • Goldman Sachs' solvency appears to be strong, with a high level of debt relative to equity. However, the increasing trend in debt could be a concern if it continues.
      • The firm is engaging with regulators regarding the increase in their stress capital buffer requirement, which they believe does not reflect the strategic evolution of their business.
    • Operational Efficiency
      • Goldman Sachs' asset utilization efficiency is below the industry average, as indicated by the low return on assets and return on equity ratios.
      • The company is experiencing increasing operating expenses, which could be a concern if it continues.
    • Cash Flow Analysis
      • Goldman Sachs' cash flow generation is strong, as evidenced by the increasing free cash flow.
      • The company's capital allocation strategy appears to be focused on shareholder returns, as evidenced by the increasing trend in cash dividends paid.
      • The firm is focused on growing its more durable revenue streams, including financing activities, management and other fees, and private banking and lending.
    • Risk Factors
      • The firm operates in a highly regulated industry and faces risks from changes in laws, rules, and regulations, as well as broader macroeconomic and market conditions.
      • The firm faces risks related to the COVID-19 pandemic, Russia's invasion of Ukraine, climate change, and potential changes to capital requirements and regulations.
      • The firm is involved in various legal proceedings, including investigations and lawsuits related to 1MDB, mortgage-backed securities, currencies, commodities, interest rate swaps, and other matters.
    • Future Outlook
      • Goldman Sachs' future prospects are positive, driven by the growth in its more durable revenue streams and strong cash flow generation.
      • The company's financial flexibility could be impacted by the increasing debt levels. However, the strong earnings and cash flow generation should provide some cushion.
      • The firm is optimistic about the application of AI and the accelerating innovation in technology, which they believe will drive demand for infrastructure and financing.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-09-18)
Financial Select Sector SPDR Fund (XLF)
  • Performance Comparison: GS has generally outperformed XLF over the past three years, with notable periods of outperformance in the 6-month, 1-year, and 2-year periods. However, GS has underperformed XLF in the 1-month and 3-month periods. This suggests that GS's performance is not consistently better than XLF's, and its performance may be more sensitive to short-term market fluctuations.
  • Risk and Return Analysis: GS has provided higher annualized returns than XLF over the past three years. However, GS has also been more volatile than XLF, as evidenced by its higher annualized volatility. GS has also experienced larger maximum drawdowns than XLF, indicating a higher risk profile.
  • Risk-Adjusted Performance: GS's Sharpe Ratio has generally been lower than XLF's, suggesting that XLF has offered a better risk-adjusted return. This is consistent with the observation that GS has been more volatile than XLF, despite providing higher returns.
  • Overall Assessment: GS has shown strong performance in terms of annualized returns, but its higher volatility and larger drawdowns suggest a higher risk profile. XLF, on the other hand, has offered a more consistent risk-adjusted return, despite lower returns. Investors seeking higher returns may consider GS, but they should be aware of the associated risks. Investors seeking a more stable and less risky investment may prefer XLF.
Peers Price History(as of 2024-09-18)
Morgan Stanley (MS)JPMorgan Chase & Co. (JPM)
  • Performance Comparison: GS has generally outperformed MS in terms of historical performance, particularly in the shorter timeframes. However, GS has underperformed JPM in the longer timeframes, indicating that JPM has been more consistent in generating returns over the long term.
  • Risk and Return Analysis: GS has provided higher annualized returns than MS in most periods, but lower returns than JPM. GS has also been more volatile than JPM, but less volatile than MS. GS's maximum drawdown has been similar to MS's, but lower than JPM's, indicating that GS has a slightly lower risk profile than MS, but a higher risk profile than JPM.
  • Risk-Adjusted Performance: GS's Sharpe Ratio has generally been lower than JPM's and MS's, indicating that GS has not been as efficient in generating risk-adjusted returns. GS's beta suggests that it has a higher risk profile than JPM, but a similar risk profile to MS.
  • Overall Assessment: GS has shown strong performance in the shorter timeframes, but its performance has been less consistent in the longer timeframes. GS has a higher risk profile than JPM, but a similar risk profile to MS. GS has not been as efficient in generating risk-adjusted returns as JPM and MS. Overall, GS appears to be a more volatile investment than JPM, but less volatile than MS. Investors should consider these factors when making investment decisions.
Peers Fundamentals(as of 2024-06-30)
Morgan Stanley (MS)JPMorgan Chase & Co. (JPM)

  1. Market Position and Size:

    • GS is a mid-sized player in the investment banking/brokers industry, with a market capitalization similar to Morgan Stanley (MS) but significantly smaller than JPMorgan Chase & Co. (JPM).
    • GS's revenue and net income are comparable to MS, but significantly lower than JPM, reflecting its size difference.

  2. Profitability and Efficiency:

    • GS's profitability metrics are generally lower than both its peers and the industry average, particularly its Net Profit Margin.
    • GS's return on assets, return on equity, return on total capital, and return on invested capital are all lower than both its peers and the industry average, indicating lower efficiency in generating returns.

  3. Financial Health and Stability:

    • GS's liquidity position is relatively weak compared to its peers, as indicated by its lower Current Ratio.
    • GS's debt position is significantly higher than its peers and the industry average, potentially exposing it to greater financial risk.

  4. Valuation and Market Perception:

    • GS is currently trading at a premium valuation compared to its peers and industry standards, suggesting that the market may be optimistic about its future prospects.
    • However, its lower profitability and efficiency may limit its ability to sustain its growth and justify its current valuation.

  5. Cash Flow and Capital Management:

    • GS's cash flow generation is mixed compared to its peers. While its free cash flow is higher than MS, its net operating cash flow is lower than JPM.
    • This suggests that GS may need to improve its cash flow generation to support its growth and shareholder value creation.

  6. Growth and Future Prospects:

    • GS exhibits strong revenue growth, but mixed performance in other metrics like net income and basic earnings per share.
    • Its inconsistent profitability and cash flow generation raise concerns about the sustainability of its growth trajectory.

  7. Potential for Investment:

    • GS presents a mixed investment proposition. While its revenue growth and earnings per share are positive indicators, its lower profitability, efficiency, and high debt levels require careful consideration.
    • Investors should assess the sustainability of its growth trajectory and its ability to improve its profitability and efficiency before making an investment decision.

  8. Key Risks and Considerations:

    • GS's lower profitability and efficiency may limit its ability to sustain its growth and compete effectively with larger players like JPM in the long term.
    • Its high debt levels raise concerns about its financial stability and ability to weather economic downturns.

  9. Overall Assessment:

    • GS's overall financial position is characterized by a combination of strengths and weaknesses. While its revenue growth and earnings per share are positive indicators, its lower profitability, efficiency, and high debt levels require attention and improvement to ensure its long-term financial stability and growth.
    • GS's competitive position is mixed, with strong revenue growth but lower profitability and efficiency compared to its peers.
    • Investors should carefully consider the sustainability of its growth trajectory and its ability to improve its profitability and efficiency before making an investment decision.