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What Does Marcus Mean to Goldman Sachs' Stock?

By Bram Berkowitz – Oct 24, 2020 at 8:16AM

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Marcus is Goldman's push into consumer banking, and could play a critical role in the bank's strategy going forward.

Marcus is Goldman Sachs' (GS -0.36%) digital consumer bank that offers high-yield savings accounts, high-yield certificate of deposits, unsecured loans, and credit cards. Goldman launched the division in 2016, but in recent years it has become much more of a focus for the leading investment bank, as Goldman looks to diversify its revenue mix and add stability to earnings when investment banking and global markets activity isn't as strong.

Here is what Marcus means to Goldman Sachs and its stock.

Digital Bank

Image source: Getty Images.

How big is the division?

If you look at a breakdown of Goldman Sachs' revenue, 60% comes from investment banking and trading activities, while the remaining 40% is split between asset management and wealth management and consumer. 

Goldman Sachs Q3 Revenue Mix

Image source: Goldman Sachs earnings presentation.

Marcus is part of the consumer slice, and had gathered $96 billion in deposits and $7 billion in loan volume at the end of the third quarter, $3 billion of which is from Goldman's new Apple card . The $96 billion in deposits is a good haul, considering there are only about 30 banks in the U.S. with more than $100 billion in assets. 

However, the consumer division still makes up a small portion of revenue. Of the roughly $1.5 billion of revenue in the third quarter from Goldman's consumer and wealth management division, nearly $1.2 billion is from wealth management, while $326 million is attributed to the consumer banking, although that's up 50% year over year .

A key part of the strategy

Although Marcus is still relatively small when you look at the portion of revenue it brings to the mix, it is a critical piece of Goldman's long-term strategy. The market right now seems to find investment banks with greater revenue diversity more attractive, with the belief that these banks can generate higher earnings when sales, trading, and investment banking activity are not as strong.

For instance, Morgan Stanley (MS 0.37%) has really worked to bulk up its asset and wealth management divisions this year, acquiring E*Trade and then Eaton Vance (EV) in two landmark deals collectively worth $20 billion. Once both of those companies are fully integrated, Morgan Stanley expects to generate more revenue from asset and wealth management than investment banking and trading. 

Currently trading at about 10 times earnings, Morgan Stanley's CEO James Gorman said investors are only valuing the company as a pure trading business. However, he said he thinks the stock should and will eventually trade more like one of its main competitors, Charles Schwab (SCHW -4.30%), which trades around 20 times earnings. The majority of Schwab's revenue comes from a range of banking services and asset management . 

Goldman is probably thinking about its consumer and wealth and asset management divisions in a similar way, trying to increase their share of overall revenue. After the third quarter, Goldman is trading at a trailing price-to-earnings multiple of 11.4 , and that's after two very strong quarters of earnings, leaving it some potential upside.

Look for Marcus to grow

The consumer piece of Goldman has been getting bigger and bigger. Marcus' high-yield savings accounts expanded into the United Kingdom and performed incredibly well. The investment bank teamed up with Apple to offer a new credit card. Recently, Marcus teamed up with Walmart to offer marketplace sellers lines of credit ranging from $10,000 to $75,000 . Goldman ultimately wants Marcus to be a full-service bank, according to Goldman's Chief Strategy Officer Stephanie Cohen , so expect Marcus to keep growing and offering new products. As of now, it looks like the more Goldman can increase revenue at Marcus, the higher investors will value the stock.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends Charles Schwab. The Motley Fool has a disclosure policy.

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