When the market offers you the chance to buy an industry-leading business with an iconic brand on sale, it never hurts to take a closer look. One such example in the current market is renowned financial services giant Goldman Sachs (GS -2.19%), whose shares are down 13% year to date and 22% from their 52-week high.
Let's start by looking at one of the main reasons Goldman shares have declined.
Shares sold off in February because the storied investment bank missed earnings estimates in its most recent quarter. The primary culprit for the miss was a 23% increase in operating expenses year over year, driven largely by increased pay and compensation for employees.
While it's not ideal to see a large increase in operating expenses, I think Goldman deserves some slack here, because like many other businesses it needed to raise pay to retain employees amid the shift to remote work while the Great Resignation led to unprecedented employee turnover and a sea change in the employer-employee relationship. I can understand a company like Goldman paying up to retain talented workers in a competitive market rather than to be in the unenviable situation many other companies find themselves in, struggling to find enough workers and having trouble keeping the ones that they have.
Furthermore, if this was a one-time blip in an unprecedented year, then this could be a good buying opportunity as the company gets expenses and earnings back on track.
Flexing its muscles in consumer
On a positive note, Goldman is taking the brand equity from its renowned investment banking division and bringing it to the consumer market. Total loans for its consumer banking platform, Marcus, grew from $106.4 billion to $146.31 billion year over year, and Chief Executive Officer David Solomon says he expects consumer revenue to grow from $1.5 billion to $4 billion over the next two years.
Marcus is gaining some serious traction in credit cards, despite its short tenure in the business, demonstrating the acumen that Goldman brings with it and how its strong brand has helped it to enter consumer banking. For example, in early 2022 Marcus took over a co-branded card with General Motors that helps customers earn points toward new GM vehicles and pays seven times points on purchases at GM. This card was previously with Capital One so this looks like a big win for Marcus over an established incumbent. Marcus also has a partnership with perhaps the most visible brand in the world, Apple, to launch a branded credit card.
From crypto skeptic to zealot?
While it is not yet a meaningful part of the company's business and it is too early to know what its ultimate strategy will be, it is exciting to see the 153-year-old bank change its stance on cryptocurrency and begin to enter the market. Just two years ago Goldman said that crypto was not a real asset class, but in March 2022 the company completed its first over-the-counter Bitcoin transaction and the company now has trading desks for Bitcoin and Ethereum futures and derivatives. Goldman made a splash this March when it changed its landing page to prominently feature Web3 and the metaverse. It's very early in this story, but I like the fact that Goldman is skating to where the puck is going by adapting to new opportunities. Furthermore, with the strength of its prestigious brand (not to mention its high pay), there's no reason to think that Goldman won't be able to attract some of the best and brightest minds in crypto to further build out its strategy here.
Shares of the financial services giant look like a bargain no matter how you slice it. The shares now trade at just 5.6 times earnings, which is much cheaper than the broader stock market, while the share-price-to-book-value is just under 1.2. Book value is basically the value you would have left if you liquidated the company and distributed its assets, so Goldman is only trading at a 20% premium to that low bar. Lastly, a price-to-earnings-growth value of 0.5 means that Goldman also looks undervalued for a company with its earnings growth. In addition to this favorable valuation, Goldman also offers investors the added bonus of a dividend yield of 2.4%.
Is Goldman Sachs a buy?
Goldman Sachs is a global financial powerhouse that looks like it is on sale right now. And given the company's attractive valuation, growing consumer business, and nascent but intriguing forays into crypto, it looks like a solid buy from here.