Formation Of Capital Solutions Group Will Capture Opportunities In Private Credit

Key Takeaways

• Strategic emphasis on Wealth Management and Alternatives aims to boost management fees, lending revenues, and support sustained earnings growth.
  
• AI-driven efficiencies and process optimizations aim to enhance operational leverage, reducing costs and boosting profitability.
  
• Regulatory and geopolitical uncertainties could affect Goldman Sachs' ROE, market sentiment, and revenue growth, especially given its reliance on cyclical capital markets and platform partnerships.

Catalysts

A financial institution, provides a range of financial services for corporations, financial institutions, governments, and individuals worldwide.

• The formation of the Capital Solutions Group positions Goldman Sachs to capture growth in private credit and alternative asset classes, potentially driving increased revenue from financing and fees by connecting companies to dependable capital.
  
• The firm's focus on scaling Wealth Management and Alternatives could significantly increase management fees and lending revenues, positively impacting net margins and contributing to sustained earnings growth.
  
• Continued strength in M&A advisory and an anticipated increase in sponsor and CEO deal-making confidence suggest robust future activity, potentially boosting revenue and earnings in the Global Banking & Markets segment.
  
• Ongoing process optimizations and investments in AI-driven efficiencies are expected to enhance operational leverage, reducing costs and thereby increasing net margins and overall profitability.
  
• The commitment to return capital to shareholders while investing in business growth and maintaining a strong capital position suggests opportunities for increasing earnings per share through strategic buybacks and sustained dividend growth.

Goldman Sachs Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Goldman Sachs Group's revenue will grow by 6.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 25.9% today to 27.8% in 3 years time.
• Analysts expect earnings to reach $17.3 billion (and earnings per share of $57.2) by about January 2028, up from $13.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.0x on those 2028 earnings, down from 15.9x today. This future PE is lower than the current PE for the US Capital Markets industry at 23.1x.
• Analysts expect the number of shares outstanding to decline by 3.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.12%, as per the Simply Wall St company report.

Goldman Sachs Group Future Earnings Per Share Growth

Risks

• Regulatory uncertainty, particularly related to potential future changes by the Federal Reserve and the impact of Basel III, could lead to increased capital requirements or costs, potentially reducing return on equity (ROE) and impacting net margins.
  
• The ongoing management of Platform Solutions, particularly the Apple Card partnership, continues to be a drag on ROE, and uncertainty around its future could affect earnings performance.
  
• Geopolitical and macroeconomic risks, including shifts in trade, tax, and energy policies, as well as cyber risks, could adversely impact market sentiment and Goldman Sachs' revenue generation capabilities.
  
• The firm's heavy reliance on capital markets activity, which is inherently cyclical, could pose a risk to revenue growth if market conditions or dealmaking environments do not sustain the anticipated improvement.
  
• The success of initiatives such as the new Capital Solutions Group is contingent on capturing market share and integrating its operations effectively; failure to do so could limit the potential revenue growth and margin improvement.

Valuation

• The analysts have a consensus price target of $635.52 for Goldman Sachs Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $782.0, and the most bearish reporting a price target of just $496.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $62.4 billion, earnings will come to $17.3 billion, and it would be trading on a PE ratio of 14.0x, assuming you use a discount rate of 8.1%.
• Given the current share price of $637.8, the analyst's price target of $635.52 is 0.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.