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Stock Analysis & Ideas

Goldman Sachs Stock is Looking Cheap after Q2 Earnings Beat

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Goldman Sachs saw a big weight lifted off its shoulders when it clocked in better-than-expected Q2 results. Even as a recession nears, Goldman stock looks too cheap to ignore, given its trading strength and promising long-term fundamentals.

Investment-banking kingpin Goldman Sachs (GS) released better-than-expected second-quarter results last week. Going into year’s end, there are a lot of potential headwinds that could continue to weigh on the bottom line. However, the bar still seems too low, with shares trading at just 1.9 times sales, 7.3 times trailing earnings, and 6.3 times cash flow. For that reason, I remain bullish on GS stock for the rest of the year.

Undoubtedly, Goldman’s per-share earnings of $7.73 were the softest in a while. That said, the bar was set so incredibly low (calling for $6.58 in per-share earnings) by analysts going into the big reveal that it didn’t take much to move the needle higher.

Goldman Sachs Clocks in Soft, but Better-than-Feared Second Quarter

Goldman’s trading was the driver of the Q2 earnings beat, helping to offset the weakness in investment banking. Commodities, fixed income, and currency trading grew by 55%, while asset management fees also soared 39% to around $1 billion.

Undoubtedly, Goldman has done a great job trading its way around a challenging environment. Evercore ISI analyst Glenn Schorr believes that Goldman Sachs’ trading business will continue to benefit “while the market backdrop is stressed.” Schorr also noted the double-digit jump in the firm’s book growth.

Indeed, Goldman Sachs is continuing to move forward in an increasingly windy market environment that’s pushing many firms backward ahead of a potential recession.

Goldman Sachs is Using Technology to Beckon in Retail Clients

Looking way ahead, Goldman Sachs is looking to expand upon its addressable market. The high-tech digital consumer banking business, in particular, could be key to next-level growth.

Over the next five years, the company believes consumer deposit balances can hit the $125 billion mark. Goldman Sachs also envisions its credit card and loan portfolio surging over $20 billion in the timespan. These are ambitious and forward-looking targets, even though they’re not set in stone.

Goldman may be a relative newcomer in the arena of retail banking. However, it has an opportunity to draw in new depositors in with intriguing financial technology, partnerships with tech heavyweights like Apple (AAPL), and its trusted brand.

With such a tech-savvy and brand-driven approach, Goldman certainly seems to be appeasing the younger crowd. Those from the Millennial and Gen Z cohorts value convenience and technology over almost everything else, and Goldman seems more than willing to give young prospective users what they want.

The Apple-Goldman partnership on the Apple Card is just one of many intriguing moves that could help consumers view Goldman Sachs in a more positive light. Goldman isn’t just a company catering to the incredibly affluent. It’s opening up its doors, and its consumer-facing Marcus platform may have its best growth days ahead.

In recent years, there have been a lot of small fintech firms seeking to disrupt banking. Now that the fintech bubble has burst, many small-cap fintech firms and startups are scrambling with interest rates on the rise. As rates rise and pressure mounts on these so-called “disruptors,” the well-capitalized banking behemoths will regain their edge.

Deep-pocketed Goldman Sachs seems like a disruptive force in retail banking that’s still trading at a fraction of the price of the smaller fintech firms out there.

With new Marcus products coming down the pipeline, I view Goldman Sachs as a stealth fintech play that’s being clouded by its traditional non-consumer-facing businesses.

Wall Street’s Take on Goldman Sachs

Turning to Wall Street, GS has a Strong Buy consensus rating based on 13 Buys and four Holds assigned in the past three months. The average GS price target of $390.60 implies 22.1% upside potential. Analyst price targets range from a low of $325.00 per share to a high of $461.00 per share.

The Bottom Line: Goldman Sachs Can Disrupt Retail Banking

Goldman Sachs faces considerable pressure on its investment banking business as we inch closer to a recession. The second-quarter beat was encouraging but should not be taken as a sign that the worst is in the rearview. Looking further out, Goldman Sachs seems to have what it takes to really disrupt its peers in the retail banking scene. I’d look for such efforts to pay off once the recession ends and a new bull run begins.

Disclosure

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