We’re raising our price target on Goldman Sachs after strong, noisy Q4
Goldman Sachs reported mixed fourth-quarter results on Thursday, but investors had plenty to like and shares rose more than 4%. Revenue in the third quarter ended Dec. 31 fell 3% year over year to $13.45 billion, missing the $13.79 billion consensus estimate compiled by data provider LSEG. According to LSEG, earnings per share (EPS) rose 17.2% year over year to $14.01; this was well above the $11.68 estimate. GS 1-year mountain Goldman Sachs 1-year return All in all, this hasn’t been the cleanest quarter, with Goldman reporting its first revenue losses since April 2023. It was also a noisy report, given that the bank divested its Apple credit card business in the reported quarter, resulting in a significant revenue hit in its platform solutions unit; this was more than offset by the release of reserves tied to provisions for loan losses. Using these funds set aside in advance for loan defaults—assuming fewer loans are expected to default—increases earnings. The bank’s other two divisions, global banking and markets and asset and wealth management, had better-than-expected revenue. The overall return on tangible equity was well above expectations, up 160 basis points from last year. Net interest income was also strong and the firm’s Common Equity Tier 1 (CET1) ratio is well above the required minimum, indicating sufficient capacity to invest in growth and return cash to shareholders. The CET1 ratio measures a bank’s financial strength and is calculated by dividing its top-quality capital (common stock, retained earnings) by its total risk-weighted assets (RWA). The higher the ratio, the greater the stability. The minimum required rate for banks varies depending on scale and importance to the financial system, but for Goldman the minimum rate is 10.9%. We see the move away from the Apple credit card as an opportunity for Goldman to focus on its core business. During the call, CEO David Solomon said he expects the company’s investment banking activity to accelerate with several catalysts, including “tremendous public and private capital fueling growth in artificial intelligence, as well as a strong increase in sponsor activity.” Why we own Goldman Sachs is our bet that deals will pick up as the regulatory environment improves under President Donald Trump. Investment banking is an important part of Goldman Sachs. Start date: Dec. 19, 2024 Last purchase: March 19, 2025 Rivals: Morgan Stanley, JPMorgan, Bank of America and Citigroup Solomon added that the firm’s investment banking backlog is at a four-year high, which will help Goldman’s other businesses. “M&A transactions often start a cascade of activity across our entire franchise,” Solomon explained. “Whether it’s an acquisition, financing, hedging activity, secondary market creation, or investment opportunities for AUM clients. There’s no denying that there’s a significant multiplier effect. And as a top advisor for over two decades, we’re uniquely positioned to capture the significant forward opportunity.” The team also updated its medium-term targets for its asset and wealth management business. The team is currently targeting a pre-tax margin for the business of around 30%, above the previous mid-range target of 20%. On the yield front, management has raised its target from mid-teens to high teens percentage. To help achieve this, the firm is now targeting long-term, fee-based net inflows of 5% annually on the platform. Given the positive momentum and our plans to accelerate growth across all business lines, we’re raising our price target from $925 to $1,050 and maintaining our 2 rating as the stock is up nearly 20% since late November when we go to press. Comment Goldman’s global banking and markets division reported fourth-quarter revenue rose 22.4% to $10.41 billion, well above expectations. Revenue from investment banking, the largest segment, increased 25% compared to last year. Growth drivers were a 41% increase in advisory revenue, an 18% increase in debt underwriting revenue, and a 4% increase in equity underwriting revenue. Fixed income, foreign exchange and commodity revenue totaled $3.11 billion, 12% above last year’s level and above the $2.94 billion expected. The strong result reflects 15% growth in brokerage revenue and 7% growth in financing. EPS increased 25% year over year “due to significantly higher net proceeds in equity financing.” The asset and wealth management division’s fourth-quarter revenue fell 1% from a year earlier, but rose 7% sequentially and still managed to beat expectations. Compared to the previous year, the segment benefited from a 10% increase in management and other fees, driven by a 5% increase in average assets under supervision, a 5% increase in private banking and lending, and a 4% increase in incentive fees. However, these gains were more than offset by a 36% decline in investment income; management noted in the statement that “net losses primarily from public equity investments are reflected in comparison with net gains in the prior year, reflecting significantly lower net gains from private equity investments.” Platform solutions revenue decreased significantly; but that’s not surprising considering we already know Goldman Sachs sold its Apple credit card business to JPMorgan. As a result, the segment lost $2.26 billion in revenue. This firmwide revenue decline was more than offset by a $2.48 billion reserve reduction in the allowance for loan losses. Regarding shareholder returns, management announced a 50 percent per share increase in its quarterly partner dividend, leaving $32 billion remaining under the firm’s existing share repurchase authority. (Jim Cramer’s Charitable Trust is long GS. See here for a full list of stocks.) When you subscribe to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trading alert before buying or selling a stock in his charitable foundation’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after issuing the trading alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH THE DISCLAIMERS. NO CIVIL OBLIGATIONS OR DUTIES EXIST OR SHALL BE RESULTING FROM YOUR RECEIVING ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULT OR PROFIT CAN BE GUARANTEED.
