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Elevator Pitch
My Hold investment rating for The Goldman Sachs Group, Inc.’s (NYSE:GS) shares stays unchanged as per my prior October 21, 2021 article where I made the case that GS is unlikely to go for a stock split (which it didn’t). My latest update for Goldman Sachs shines the spotlight on the bank’s upcoming quarterly financial results announcement. Weak investment banking revenues are expected to be the key contributor to GS’ sharp YoY decline in its bottom line for Q1 2022. Goldman Sachs’ valuations can only re-rate over time, when it diversifies to become less dependent on cyclical investment banking fees. As of now, GS is fairly valued and deserving of a Hold rating before upcoming earnings.
GS Stock Key Metrics
In setting expectations for GS’ 1Q 2022 financial performance, it is important to understand how investment banking activity has been like in the first quarter of this year. This is because the investment banking segment was a star for Goldman Sachs last year. The investment banking business’ segment revenue rose by +58% to $14.9 billion in FY 2021, which accounted for a quarter of GS’ top line as per its most recent quarterly earnings presentation slides.
According to global investment banking data obtained from Dealogic (not publicly available), completed mergers & acquisition deal volume decreased by approximately -31% QoQ from $1.62 trillion in the fourth quarter of 2021 to $1.12 trillion in the first quarter of the current year. During this same period, fees derived from initial public offerings contracted by roughly -64% on a QoQ basis from $146 billion in Q4 2021 to $53 billion in Q1 2022. Debt capital markets fared slightly better with debt underwriting fees increasing marginally by +1% YoY in the first quarter of 2022; but debt underwriting fees still fell by a third YoY from $9.0 billion in Q1 2021 to $5.9 billion in Q1 2022.
The lacklustre 1Q 2022 expectations for the investment banking revenues for GS and its peers are also validated by other sources. An earlier March 11, 2022 Seeking Alpha News article citing data from S&P Global Market Intelligence noted that “mergers and acquisitions deals valued at more than $10B are on track to see the fewest since Q2 2020.” Separately, the aggregate equity capital markets fees for the five largest US banks (including GS) fell from $5.3 billion in Q1 2021 to as low as $645 million in Q1 2022, according to a recent Seeking Alpha News article published on April 10, 2022.
The investment banking business segment could be a weak spot for Goldman Sachs in Q1 2022, as per the industry data highlighted above.
When Does Goldman Sachs Report Earnings?
Goldman Sachs is reporting the bank’s earnings for the first quarter of the current year on April 14, 2022 before the market opens, as disclosed in a media release published last month on March 7.
What To Expect From Earnings
In terms of trying to predict how Goldman Sachs could have performed in Q1 2022, one has to see if the bank’s 2021 growth drivers can be sustained this year.
GS’ top line expanded by an impressive +33% from $44.6 billion in fiscal 2020 to $59.3 billion in fiscal 2021 as indicated in the company’s Q4 2021 results presentation. As I highlighted in an earlier section of the article, Goldman Sachs’ investment banking segment saw a +58% growth in revenue in 2021. But the investment banking business was only the second-best performer among GS’ four segments; revenue for Goldman Sachs’ asset management business segment jumped by +87% to $14.9 billion last year. GS’ other two business segments are global banking and consumer & wealth management, respectively.
As I have mentioned earlier, I don’t think Goldman Sachs’ investment banking business has performed well in the first quarter of 2022 as evidenced by weaker investment banking industry trends. Unfortunately, the bank’s asset management segment has also most probably underperformed in Q1 2022.
Goldman Sachs highlighted at the bank’s Q4 2021 investor briefing on January 18, 2022 that its “record revenues” for the asset management segment in full-year 2021 was largely “helped by significant gains in equity investments, particularly in the first half of the year.” There is a low probability that a repeat of such a good performance for GS’ asset management business will happen in Q1 2022.
A reference for the potential performance of GS’ asset management business could be MSCI’s (MSCI) ACWI Index which is referred to as the company’s “flagship global equity index” on its website. The MSCI ACWI index was down -5.36% in Q1 2022, as compared with a +18.54% rise in the index during 2021.
What Is Goldman Sachs’ Forecast?
The Wall Street’s consensus financial forecasts point to Goldman Sachs’ revenue and non-GAAP adjusted earnings per share decreasing by -33% YoY and -53% YoY to $11.79 billion and $8.83, respectively for Q1 2022. It is also noteworthy that GS’ first-quarter sell-side consensus top line and bottom line estimates have been revised downwards by -9% and -16%, respectively in the last three months as well.
I hold the view that Goldman Sachs’ current Q1 2022 forecasts are reasonable. The lower fees for investment banking and asset management will hurt GS’ top line in the first quarter of this year, and 1Q/1H 2021 is also a difficult base for comparison with respect to the asset management segment as per company management’s comments referred to in the preceding section. The effects of negative operating leverage implies that Goldman Sachs’ bottom line should fall to a larger degree as compared to its revenue, as reflected in the consensus numbers.
Is GS Stock Overvalued Now?
GS’s current stock valuations are fair in my opinion, as opposed to being overvalued or undervalued.
On a historical valuation comparison, Goldman Sachs’ trailing price to tangible book value of 1.08 times according to its stock price of $321.39 as of April 8, 2022 and as per S&P Capital IQ appears to be quite fair. GS’ 10-year average trailing price to tangible book value is only slightly higher at 1.16 times.
Also, I have previously noted in my October 2021 article for GS that “it will require time for GS to be less dependent on more cyclical revenue streams like trading and investment banking” before the stock can command a higher valuation multiple. The cyclicality of Goldman Sachs’ investment banking revenues is reflected in the weak expectations for the bank’s Q1 2022 financial performance.
Is GS Stock A Buy, Sell, Or Hold?
GS stock is a Hold as its valuations are fair and the company’s shares have already corrected in anticipation of the YoY earnings drop in Q1 2022. Goldman Sachs’ share price has already fallen by -16% year-to-date in 2022, and its current trailing price to tangible book value multiple is close to its 10-year mean.
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