POLAND – 2020/03/19: In this photo illustration a Goldman Sachs logo seen displayed on a smartphone … [+]
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Having gained almost 30% since hitting a low of $135 on March 23, Goldman Sachs’ stock (NYSE: GS) may yet gain some more. Our belief stems from the fact that Goldman Sachs’ stock remains about 25% lower than the level it was at the beginning of 2020 as well as at the end of 2016. Our dashboard, Why Goldman Sachs Stock moved only 0.6% between 2016 and 2019 despite 19% growth in revenues, provides the key numbers behind our thinking and we explain more below.
Although Goldman Sachs’ revenues have grown roughly 19% from 2016 to 2019, the gain did not reflect completely in the bottom line as the net income margin reduced from 23.2% in 2016 to 21.6% in 2019 due to higher non-interest expenses – especially due to a jump in compensation cost. However, earnings per share increased by 28% over the period thanks to share buybacks. Specifically, the company has invested about $15.4 billion in repurchases in the last three years, resulting in about 13% lower outstanding shares.
Goldman Sachs’ P/E ratio dropped 21.5% from about 13.7x at the end of 2016 to over 10.8x at the end of 2019. While Goldman Sachs’ P/E is down to about 8.1x now, given the volatility of the current situation, there is a significant possible upside for Goldman Sachs’ multiple when compared to levels seen in the past years.
How Is Coronavirus Impacting Goldman Sachs’ Stock?
Goldman Sachs’ stock has suffered as states and countries are on lockdown due to Coronavirus pandemic. There is a drop in consumer demand as people are refraining from discretionary expenditures coupled with lower business spending. The economic downturn could cause significant losses for businesses and individuals alike, impacting their loan repayment capability. This could result in sizable losses for the bank, as it has a sizable portfolio of both consumer and commercial loans. Similarly, the lower market activity would mean a drop in investment banking as well as capital raising deals – resulting in a decline in advisory & underwriting fees. While the company reported no revenue growth in Q1 on a year-on-year basis, we believe that Q2 will confirm this reality with a drop in revenues across segments.
Further, if there are signs of abatement of the crisis by the time Q2 results are announced, the company’s stock could see a meaningful uptick. Goldman Sachs’ 25% decline since the beginning of 2020 has outperformed Citigroup’s 48% drop over the same period, although they both have underperformed the broader markets (S&P 500 down 12%). In the current scenario, we believe Goldman Sachs’ stock is likely to remain around its current levels, with significant upside potential post coronavirus.
Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a more complete macro picture. It complements our analyses of the coronavirus outbreak’s impact on a diverse set of Goldman Sachs’ peers. The complete set of coronavirus impact and timing analyses is available here.