Goldman Sachs Group Inc.
made its financial promises. Investors are still unimpressed.
When the bank updated its corporate strategy in a January 2020 presentation to investors, the bank set new goals for how to use shareholder money profitably. Goldman says it will target a return on equity of 13% to 14% over the next few years.
Despite expectations, the pandemic has ushered in an explosion in corporate deals and initial public offerings. Volatile stock, commodity and bond markets lead to a significant increase in trading revenue. Goldman made record profits in 2021. The returns far exceeded the bank’s promises.
While Chief Executive David Solomon warned in February that those results were unsustainable, the bank continued to operate even after the pandemic outbreak died down. In February, Goldman said it expected a return on equity of 14% to 16% over the next three years. That profit was 15% in the first quarter.
However, after a big rally, Goldman stock has returned to normal. According to FactSet, they now trade at nearly 1.1 times their book value, virtually unchanged from their 2020 investor launch date and in line with rivals including Bank of America. Corp.
and Wells Fargo & Co. Goldman’s rival Morgan Stanley trades at 1.6 times book value, a significant increase from its early 2020 valuation, while JPMorgan Chase & Co. trades at 1.5x.
Shares of Goldman closed Thursday at $324.25, up 35% from the day it introduced to investors but down 15% so far this year.
John Waldron, chairman and chief executive officer, said at an investor conference Thursday, Goldman sees a long-term opportunity to expand the company’s wealth and wealth management units. The company is targeting more than $10 billion in company-wide management fees by 2024, up from $7.6 billion in 2021, he said.
Wells Fargo analyst Mike Mayo said concerns that too much of Goldman’s businesses are sensitive to the strength of capital markets, such as commercial and investment banking, help explain overvaluing. short. “Sustainability is a word on everyone’s mind,” he said.
The higher valuations stem in part from a greater presence in businesses that are less sensitive to Wall Street conditions, such as money management for wealthy clients. Wealth management revenue was $1.62 billion in the first quarter at Goldman, up 19% from a year earlier and accounting for 13% of the company’s total revenue. At Morgan Stanley, wealth management accounts for 40% of total revenue. The Eaton Vance and E*Trade acquisitions help support that business.
Mr. Mayo, who rates Goldman’s stock better than his $420 price target, thinks the bank’s business is more durable than most investors think. Private equity funds have a lot of cash that they need to operate. Businesses must adapt to changes in consumer behavior caused by the pandemic. Those factors will make trading activity more consistent in the years to come, he said.
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https://www.wsj.com/articles/goldman-sachs-stock-sputters-despite-brisk-run-of-business-11654143838?mod=rss_markets_main Goldman Sachs Stock Sputters Despite Brisk Run of Business