Strategic Focus and Global Banking Strengths Propel Revenue Growth and Operational Efficiency

What are the underlying business or industry changes driving this perspective?

• The potential for rate cuts in the first half of the year boosts optimism for a soft landing, which could lead to increased strategic activity reflected in the firm's backlog, impacting investment banking revenues positively.
• Strategic narrowing of focus and exiting non-core businesses (e.g., market's lending business, Personal Financial Management, and GreenSky) will reduce operational complexity and potentially increase net margins by focusing on areas of strength.
• Record total financing revenues in Global Banking & Markets and solid investment performance in Asset & Wealth Management indicate a growth trajectory, directly impacting revenues and earnings.
• Substantial progress in reducing historical principal investments and surpassing alternatives fundraising target ahead of schedule, likely improving earnings through management and other fees growth.
• Continued investment in strengthening client franchises and gains in wallet share, especially in Global Banking & Markets, are expected to drive revenue growth through increased transaction volumes and financing activities.

How have these above catalysts been quantified?

• Analysts are assuming Goldman Sachs Group's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.4% today to 24.7% in 3 years time.
• Analysts expect earnings to reach $13.3 billion (and earnings per share of $41.76) by about March 2027, up from $7.9 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.7x on those 2027 earnings, down from 17.0x today.
• To value all of this in today’s dollars, we will use a discount rate of 8.32%, as per the Simply Wall St company report.

What could happen that would invalidate this narrative?

• The potential slowdown in the Chinese market can impact the global investment banking and capital markets activity, possibly affecting Goldman Sachs’ revenue growth in Asia.
• Increased competition and market share gains in FICC & Equities financing may require higher capital allocation, affecting return on equity (ROE) and potentially increasing risk exposure.
• The exit from legacy on balance sheet principal investments could result in short-term costs or losses impacting net earnings until completely phased out.
• Regulatory uncertainties, including potential outcomes of the Basel III Endgame proposals, could necessitate adjustments to business operations and capital allocation, impacting profitability and operational flexibility.
• Continued focus on pay-for-performance compensation strategy, while essential for talent retention, could limit the potential for operational expense leverage in periods of significant revenue growth, affecting overall efficiency and profit margins.

• The analysts have a consensus price target of $415.5 for Goldman Sachs Group based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with this, you'd need to believe that by 2027, revenues will be $53.9 billion, earnings will come to $13.3 billion, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $388.61, the analyst's price target of $415.5 is 6.5% higher. The relatively low difference between the current share price and the analyst target indicates that they believe 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.