M&A Revival And Wealth Management Growth Spark A Bright Future For Global Financial Firm

Key Takeaways

• Strength in M&A activity and asset management inflows signals potential revenue and earnings growth for Goldman Sachs.
  
• Expansion into ultra-high net worth wealth management and improved capital flexibility may enhance margins and ROE.
  
• Narrowing consumer operations, regulatory uncertainty, competitive trading landscape, reduced principal investments, and geopolitical risks threaten Goldman Sachs' profitability and market position.

Catalysts

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

• Goldman Sachs expects to benefit from a resurgence in M&A activity and a growing investment banking backlog, which could lead to increased revenues in Global Banking & Markets.
  
• The firm’s Asset & Wealth Management segment is experiencing consistent long-term net inflows, with assets under supervision reaching record levels and growing management fees, which could lead to enhanced earnings stability and growth.
  
• Strong fundraising in Alternatives, especially in private credit and private equity, is anticipated to exceed $60 billion for 2024, contributing to future revenue and earnings growth.
  
• Goldman Sachs aims to expand its ultra-high net worth franchise and adviser footprint in Wealth Management, which could boost pretax margins and improve net margins over time.
  
• Enhancements in regulatory capital requirements and successful engagement with regulatory processes might provide increased flexibility in capital deployment, potentially improving return on equity (ROE) and earnings per share (EPS).

Goldman Sachs Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Goldman Sachs Group's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.1% today to 26.8% in 3 years time.
• Analysts expect earnings to reach $15.9 billion (and earnings per share of $52.28) by about November 2027, up from $11.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $13.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.7x on those 2027 earnings, down from 16.8x today. This future PE is lower than the current PE for the US Capital Markets industry at 23.6x.
• Analysts expect the number of shares outstanding to decline by 2.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.03%, as per the Simply Wall St company report.

Goldman Sachs Group Future Earnings Per Share Growth

Risks

• The narrowing of Goldman Sachs' consumer footprint and transitional agreements like the GM card platform have impacted their return on equity (ROE) and earnings per share (EPS), posing a risk of continued financial drags if divestitures don't proceed as planned. This could affect net margins and overall earnings performance.
  
• There is uncertainty around the regulatory environment with concerns about the Basel III revisions. The ambiguity in capital requirements could lead to higher capital reserves, increasing the cost of credit for businesses and impacting revenue and growth prospects for Goldman Sachs.
  
• Competition in trading, both from traditional financial institutions and non-bank trading venues, could impact Goldman Sachs' market share and revenue streams, particularly as these competitors advance in electronic trading and private credit offerings.
  
• The ongoing reduction of the principal investment portfolio may lead to lower returns as these historically high-return investments are replaced with potentially lower-margin businesses, impacting the firm's overall profitability and net margins.
  
• Unpredictable geopolitical developments and the trajectory of interest rates globally post risks to Goldman Sachs' clients' engagement and market conditions, potentially impacting their revenue through lesser client activity and financial market volatility.

Valuation

• The analysts have a consensus price target of $566.89 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 $680.0, and the most bearish reporting a price target of just $450.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $59.4 billion, earnings will come to $15.9 billion, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 8.0%.
• Given the current share price of $581.38, the analyst's price target of $566.89 is 2.6% 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.