Source: PaxForex Premium Analytics Portal, Fundamental Insight
The name Goldman Sachs has been synonymous with investment banking for decades. This company is one of the largest investment banks in the world, if not the largest. Goldman has a leading market share in several areas of investment banking, including mergers and acquisitions (M&A) and equity underwriting.
But the bank also has a lower valuation than many of its peers, largely because most of its revenue comes from investment banking and trading activities. Of course, Goldman needs to maintain its dominant position in this business, but if Goldman wants a higher valuation, it needs to successfully develop and succeed in other businesses under its umbrella. Here's why.
There is no denying Goldman's strengths in its investment banking and merchant banking businesses. But by their very nature, revenues from these businesses can be unreliable and difficult to predict. Many investment banking businesses can perform better during periods of volatility. That's why investment banking thrived in the first two years of the pandemic, and why Goldman's profits rose sharply in 2020 and 2021. But those profits will decline as global conditions normalize, although trading revenues rose in the first quarter of this year because of volatility in the markets. Nevertheless, it is this dynamic that has caused Goldman to be priced lower than some of its major competitors.
Goldman trades at a much lower earnings ratio than Morgan Stanley and JPMorgan Chase and even trades on par with Citigroup, which has suffered from regulatory problems and years of lagging earnings.
The main reason is that most of Goldman's earnings are related to investment banking, sales, and trading. In the first quarter of 2022, about 80% of the company's revenues came from these two divisions. Interestingly, Morgan Stanley, a fairly close company, by comparison, used to have this problem as well, but it has been developing its investment divisions over the past decade, culminating in the acquisition of E*Trade and Eaton Vance in recent years.
Between 2009 and 2021, Morgan Stanley's wealth management revenue grew 166% and its investment management revenue grew 500%. Together, the two businesses will account for 50% of total revenue in 2021. As a result, Morgan Stanley's stock rose sharply during the pandemic, and the bank set higher long-term return targets than almost all of its competitors.
Goldman appears to be charting a similar course, developing its asset management and wealth management divisions as well as its consumer bank. Goldman's consumer bank division includes digital consumer bank Marcus, which offers deposit accounts and a variety of credit products, including credit cards and personal loans. These three divisions can provide the bank with longer-term and more predictable revenues.
Goldman's consumer credit, asset management, and wealth management divisions accounted for about 38% of total revenue in 2021. But the company has more aggressive goals on which it is working. On the asset and wealth management side, Goldman recently set new long-term goals under which it wants to organically grow client assets by $350 billion a year through 2024, reaching more than $10 billion in client management fees and other charges.
In consumer banking and Marcus, Goldman also has big ambitions. Marcus has collected more than $100 billion in deposits since it opened and hopes to reach more than $150 billion in deposits by 2024. Goldman wants to increase the volume of loans originated primarily by Marcus from $12 billion at the end of 2021 to more than $30 billion in 2024, and finally, the bank wants to increase total consumer lending revenue from $1.5 billion in 2021 to about $4 billion in 2024.
Investment banking and trading will always be Goldman's bread and butter, and if it loses market share, investors won't be happy. But the ticket to a higher valuation on par with Morgan Stanley lies through realization in the asset and wealth management segment and the consumer banking division. The goal is for revenues from these three divisions to contribute to greater earnings predictability, make up a larger percentage of total revenues, and grow total income. Given Goldman's success in the Marcus and Consumer Banking segments, it is safe to say that management will be able to meet the goal.
As long as the price is below 346.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 321.31
- Take Profit 1: 312.00
- Take Profit 2: 300.00
Alternative scenario:
If the level of 346.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 346.00
- Take Profit 1: 358.00
- Take Profit 2: 375.00
