[IN-DEPTH ANALYSIS] Goldman Sachs: Why It's Time to Reconsider Valuation

Source: TradingView

Key Takeaways

• Strategic Focus: Goldman Sachs prioritizes investment banking and trading, with its "One Goldman Sachs" strategy improving operational efficiency and client service, while exiting lower-margin retail banking to focus on higher-margin sectors.
• Growth in Key Divisions: Global Banking & Markets and Asset & Wealth Management both experienced strong growth in 2024, driven by increased M&A activity, higher management fees, and strong demand in private banking.
• Technological Integration: The firm is investing in AI and digital platforms to enhance trading efficiency, risk management, and automation, aiming to increase profitability and reduce operational costs.
• Valuation and Outlook: With expectations of deregulation and continued growth in M&A and alternative assets, Goldman Sachs' valuation appears overly pessimistic, with a target price of $608 for 2025 based on a forward PEG of 0.85.

Company Overview

Goldman Sachs, headquartered in New York City, is a global investment bank primarily focused on Global Banking & Markets, which accounts for 65% of its revenue, followed by Asset & Wealth Management at 30% and Platform Solutions at 5%. The Company is known for its expertise in investment banking, trading, and asset management, offering advisory services, underwriting, and financial solutions to institutional clients.

Source: TradingKey, Goldman Sachs

Unlike competitors, Goldman Sachs stands out for its strong emphasis on investment banking and trading. In contrast to Morgan Stanley, which is more wealth management-focused, Goldman Sachs prioritizes corporate and institutional financial services. Compared to Bank of America, a traditional retail bank, and JPMorgan Chase, which provides a broader range of services, Goldman Sachs’ more focused business model allows it to be agile and adaptable, benefiting from quicker decision-making, faster response to new opportunities, and rapid innovation.

Strategic Analysis—One Goldman Sachs Strategy

"One Goldman Sachs" has been a cornerstone of Goldman Sachs' strategy over the past few years, aimed at integrating internal resources and business units to enhance operational efficiency, optimize client service, and drive long-term growth.

• Business Integration and Cross-Department Collaboration: In 2022, Goldman Sachs unified Investment Banking and Global Markets into the Global Banking & Markets division under the One Goldman Sachs strategy, improving operational efficiency and client solutions. This integration resulted in stronger client relationships, enhanced operational flexibility, and a 16% increase in net revenues in 2024, highlighting the positive impact on client insights and internal efficiencies.
• Exit from Retail Banking: Goldman Sachs made strategic moves to exit retail banking, notably through its efforts to exit the Apple Card partnership. This decision underscores Goldman Sachs’ intent to focus on its higher-margin core businesses like investment banking, asset & wealth management. By stepping back from consumer-facing services, the company is reallocating resources to its more profitable sectors, which is expected to enhance long-term profitability and reduce exposure to lower-margin retail operations.
• Optimized Resource Allocation and Technological Integration: By integrating capital and technology platforms, Goldman Sachs streamlined operations, eliminating redundant investments and improving efficiency. Shared platforms across FICC and Equities departments enhanced decision-making and profitability, particularly in trade execution and risk management.
• Strategic Flexibility and Long-Term Growth: Goldman Sachs’ investments in digital transformation and AI-driven trading platforms, such as Marcus and GreenSky, position it at the forefront of fintech. Additionally, with its scale, Goldman Sachs is well-positioned to quickly and efficiently adopt AI, making it a leader in using AI-driven solutions to enhance profitability and efficiency. Its industry-leading compensation packages attract top talent, which is critical for long-term growth. This talent helps strengthen its market position, improve operations, and enable rapid execution of strategic changes and innovation.

Source: TradingKey, Goldman Sachs

Financial Performance Analysis

1.Global Banking & Markets Performance

In 2024, Global Banking & Markets generated $34.94 billion in net revenues, marking a 16% increase from 2023. Key drivers behind this performance included significant growth in investment banking fees, Equities and FICC, specifically in FICC intermediation, and equities financing.

Source: TradingKey, Goldman Sachs

• Investment Banking Fees: Revenues from Investment Banking Fees increased by 24%, reaching $7.73 billion. This growth was largely driven by a strong recovery in equity underwriting and advisory services. Particularly, mergers and acquisitions (M&A) advisory services saw a surge in demand, which contributed significantly to the overall increase in investment banking fees. The equity underwriting segment also rebounded with higher market activity, driven by initial public offerings (IPOs) and secondary offerings.
• FICC: The FICC business generated $13.20 billion in revenue, representing a 9% increase from 2023. This growth was primarily driven by FICC intermediation especially the interest rate and credit products, where demand surged as clients sought to manage market volatility and hedging needs. The firm capitalized on these market conditions with strong trading volumes in fixed-income securities. However, commodities trading was relatively weaker, which somewhat limited the overall performance within FICC.
• Equities: The Equities division reported $13.43 billion in revenues, a 16% increase from the previous year. Equities financing and intermediation were the standout performers, benefiting from higher market activity, especially in equity derivatives and structured products. However, the overall growth in Equities was slightly tempered by competitive pressures in equity derivatives and a decline in commodities trading, which led to margin compression.

Source: Goldman Sachs

2.Asset & Wealth Management Performance

Asset & Wealth Management posted strong results in 2024, with $16.14 billion in net revenues, a 16% increase from the prior year. The growth was driven by a combination of higher management fees, strong equity investments, and increased demand for private banking and lending services.

Source: TradingKey, Goldman Sachs

• Management and Other Fees: This segment generated $10.43 billion in revenues, growing 10% from 2023. The increase was fueled by higher assets under supervision. During 2024, our AUS increased $325 billion due to net inflows and market appreciation (primarily in equity assets). Goldman Sachs has reduced its exposure to Fixed Income while increasing its exposure to Alternative investments and Equities. The proportion of Fixed Income in AUS decreased from 40% to 38%, while the proportion of Alternative investments and Equities increased from 10% and 23% in 2023 to 11% and 25% in 2024, respectively.

Source: Goldman Sachs

• Private Banking and Lending: Private banking revenues grew by 12% to $2.88 billion, reflecting increased demand for wealth management and lending products. This was particularly driven by a rise in high-net-worth individuals (HNWIs) seeking personalized wealth management services, including tailored lending solutions.
• Equity Investments: The equity investments division saw a significant surge in revenues, up 297% to $1.36 billion in 2024. This remarkable growth was driven by a strong rebound in public equity markets, particularly profitable private equity investments. The positive market conditions provided an excellent environment for equity capital gains, which fueled this strong performance.

Source: Goldman Sachs

• Debt Investments: The debt investments segment generated $1.08 billion in revenues but experienced a decline of 18%. This was primarily due to higher interest rates and reduced demand for structured debt products, which affected the overall growth of this business.

3.The Platform Solutions

The Platform Solutions division grew by 2% in 2024, generating $2.43 billion in net revenues. This growth was primarily driven by continued expansion in transaction banking and consumer finance offerings.

• Transaction Banking: Goldman Sachs provide transaction banking and other services, such as deposit-taking, payment solutions and other cash management services, for corporate and institutional clients. Transaction banking net revenues were lower, primarily reflecting lower net revenues related to the seller financing loan portfolio.
• Consumer Platform: The increase in Consumer platforms net revenues reflected higher average credit card balances and higher average deposit balances, largely offset by the impact of the planned transition of the General Motors credit card program to another issuer.

Opportunities and Risk

Management expects the U.S. economy to remain resilient despite weaker consumer behavior, as inflation and unemployment data will continue to support expectations of a soft landing, further stimulating economic activity and the recovery of capital markets. On the policy front, although there is uncertainty, improvements in the regulatory environment (such as CCAR and Basel III adjustments) are expected to support capital market activities and drive a rebound in risk assets.

In terms of performance outlook, capital market activities are expected to recover, especially with an increase in M&A and IPO, benefiting from regulatory easing and strong financing demand. FICC and Equities departments are expected to continue growing, with financing activities potentially reaching record highs. In Asset & Wealth Management, strong growth is expected in high-net-worth clients and alternative assets, driving management fees and private banking and lending income growth. Management fees are expected to maintain high single-digit growth (above 5% annual growth).

Additionally, Goldman Sachs plans to increase investments in artificial intelligence, particularly using AI for data analysis and risk management in trading platforms and client services to improve efficiency and accuracy. As fintech and digital banking services rapidly grow, especially with increasing demand from younger consumers and small-to-medium enterprises, Goldman Sachs could further invest in AI. By optimizing its payment solutions, lending, wealth management, and blockchain technologies, Goldman Sachs has the potential to gain more market shares.

On the risk side, Goldman Sachs faces intense competition in the capital markets and investment banking sectors, especially from non-bank electronic trading platforms. Economic uncertainty, trade policies, interest rate fluctuations, and geopolitical risks could impact market liquidity and capital market activities.

Valuation

Goldman Sachs experienced strong growth in 2024, particularly in investment banking and trading. Asset & Wealth Management also showed notable expansion, driven by higher management fees and increased demand for private banking services. The company is streamlining its operations by exiting retail banking and focusing on technological investments, including AI, to improve efficiency. From an employee perspective, Goldman Sachs' relatively smaller size allows for more agile strategic shifts and effective implementation of new technologies and policies. With expectations of deregulation, the company anticipates further growth in M&A, IPOs, and alternative assets. Additionally, the anticipated volatility in 2025, driven by Trump, is expected to be a significant positive factor for the Equity business.

Given Goldman Sachs' profitability, market position, and potential catalysts, the current valuation is overly pessimistic, as reflected in its forward PEG of just 0.64. A more reasonable forward PEG should be in the range of 0.85 to 0.95. Considering potential catalysts, I expect a 20% uplift in Global Banking & Markets' EPS. However, as U.S. capital markets, particularly the stock market, may not replicate the strong AI-driven growth of 2024, I anticipate the growth in Asset & Wealth Management’s earnings, which surged 227% in 2024, will return to a more sustainable rate, with a projected 15% EPS growth in 2025. Assuming no change in the growth rate for Platform Solutions' EPS, I estimate Goldman Sachs' overall EPS will grow by approximately 15.3% in 2025 to $46.74, slightly above the LSEG Smart Estimate of $46.39. With a conservative PEG of 0.85, the 2025 target price for Goldman Sachs is estimated to be around $608 per share.

Source: TradingKey, LSEG