Fintech Disruption And Regulatory Pressure Will Erode Margins

Key Takeaways

• Digital disruption, regulatory burdens, and fee compression are undermining margins and long-term profitability across the firm's key business segments.
  
• Underperformance in consumer banking and reliance on volatile markets hinder diversification and threaten stability of future earnings.
  
• Long-term growth in asset management, technological innovation, and strong capital returns position Goldman Sachs for stable earnings and resilience amid market volatility.

Catalysts

A financial institution, provides a range of financial services for corporations, financial institutions, governments, and individuals in the Americas, Europe, the Middle East, Africa, and Asia.

• Goldman Sachs faces long-term earnings headwinds as rising digitization and the proliferation of fintech disruptors are expected to steadily erode the firm's margins across investment banking, trading, and wealth management, with digital-first competitors and technology giants threatening to displace legacy offerings and compress fees.
  
• Continued global regulatory intensity and escalating compliance requirements around capital, risk controls, and ESG disclosures are poised to increase operational expenses and reduce profitability, with the company itself warning of persistent high supervisory costs and an uncertain path for regulatory relief, limiting any material improvement in long-term net margins.
  
• Heightened geopolitical instability and fragmentation of capital markets have translated into pronounced volatility and have already led to muted investment banking activity and lower cross-border deal flow; management cautioned that closing out its elevated deal backlog is highly dependent on a more stable policy and economic environment, putting future advisory revenues at risk.
  
• Repeated setbacks and subscale performance in consumer banking and struggles to scale digital platforms have prevented the firm from achieving efficient diversification, keeping an overreliance on cyclical trading and investment banking and resulting in structurally volatile net revenues and lower reliability of long-term earnings growth.
  
• Increased asset management fee compression driven by passive strategies, cut-throat competition, and technology-led commoditization is likely to depress fee-based income over time, and management's own discussion highlighted that even flagship alternative product launches have not prevented a meaningful step-down in alt-credit fee rates, threatening the firm's margin sustainability and earnings visibility.

Goldman Sachs Group Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Goldman Sachs Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Goldman Sachs Group's revenue will remain fairly flat over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 29.6% today to 27.8% in 3 years time.
• The bearish analysts expect earnings to reach $18.8 billion (and earnings per share of $69.13) by about August 2029, down from $20.0 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $27.6 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.9x on those 2029 earnings, up from 15.8x today. This future PE is lower than the current PE for the US Capital Markets industry at 37.7x.
• The bearish analysts expect the number of shares outstanding to decline by 4.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.27%, as per the Simply Wall St company report.

Risks

• Continued long-term growth and diversification in asset and wealth management are driving record assets under supervision of $3.2 trillion, supported by 29 consecutive quarters of net fee inflows, which enhances stable, recurring fee-based revenue and improves overall net margins.
  
• Strategic expansion of alternative investments and successful fundraising, including $19 billion in third-party alternatives raised this quarter and $342 billion since 2019, positions Goldman Sachs to capture growing institutional and retail demand for private assets, positively impacting long-term revenue streams and earnings.
  
• Aggressive investment in technology, automation, and AI is streamlining operations, unlocking efficiencies, and reducing expenses, which is likely to lower the cost-to-income ratio and support stronger net margins and operational leverage over time.
  
• A multiyear $40 billion share repurchase and a commitment to a sustainable, growing dividend drive significant capital returns to shareholders, indicating robust excess capital generation and supporting both earnings per share and investor confidence.
  
• The global scale and resilient franchise, underscored by leading positions in M&A advisory, debt underwriting, and global markets, combined with improved regulatory outlook and potential capital relief, can support continued elevated client activity, stable revenue generation, and long-term earnings growth even in periods of market uncertainty.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Goldman Sachs Group is $866.54, which represents up to two standard deviations below the consensus price target of $1141.65. This valuation is based on what can be assumed as the expectations of Goldman Sachs Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $1325.0, and the most bearish reporting a price target of just $730.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $67.7 billion, earnings will come to $18.8 billion, and it would be trading on a PE ratio of 15.9x, assuming you use a discount rate of 9.3%.
• Given the current share price of $1042.63, the analyst price target of $866.54 is 20.3% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
• 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.