Goldman Sachs (NYSE: GS) is scheduled to report its fiscal Q1 2021 results on Wednesday, April 14. We expect Goldman Sachs to outperform the consensus estimates for revenues and earnings. The bank has reported better than expected results in each of the last three quarters, mainly due to its strength in sales & trading and the investment banking space. Despite the economic slowdown and the Covid-19 crisis, the company reported strong revenue growth in 2020, driven by a 43% y-o-y jump in global markets division (sales & trading) and a 24% rise in the investment banking unit. We expect the same trend to drive the first-quarter FY2021 results as well.
Our forecast indicates that Goldman Sachs’ valuation is around $366 per share, which is 12% more than the current market price of around $327. Look at our interactive dashboard analysis on Goldman Sachs’ pre-earnings: What To Expect in Q1? for more details.
(1) Revenues expected to be slightly ahead of the consensus estimates in Q1
Trefis estimates Goldman Sachs’ fiscal Q1 2021 revenues to be around $10.95 billion, marginally above the $10.80 billion consensus estimate. The bank’s revenue figure of $44.6 billion in 2020 was a solid 22% above the 2019 figure – the growth was unusually higher as compared to the CAGR of 6.1% over 2016-2019. This could mainly be attributed to higher trading activity in the securities market and a jump in underwriting deal volumes (both equity underwriting and debt issuance), which boosted its trading and investment banking revenues. Further, its consumer & wealth management unit, which contributed 13% of the revenue share in 2020, grew 10% y-o-y. While the wealth management businesses grew due to higher management and other fees and growth in average Assets under Supervision (AuS), the consumer banking segment benefited from higher credit card loans and deposit balances. The only segment which reported negative growth in the year was asset management (down 11% y-o-y), mainly due to lower equity investments, and lending & debt investment revenues. We expect the same momentum to continue in the first quarter of FY2021.
The higher trading activity and a jump in underwriting deal volumes in 2020 were due to the impact of the Covid-19 crisis and the economic slowdown. However, as more and more people receive the Covid-19 vaccine and the economic conditions improve, the volumes are likely to normalize in the subsequent quarters. This is likely to hurt the bank’s revenues, restricting it to $41.1 billion in FY2021. Our dashboard on Goldman Sachs revenues offers more details on the company’s segments.
2) EPS likely to beat the consensus estimates
Goldman Sachs’ Q1 2021 adjusted earnings per share (EPS) is expected to be $8.98 per Trefis analysis, almost 3% above the consensus estimate of $8.75. The bank’s EPS figures increased in 2020 from $21.18 in 2019 to $24.94 in 2020. This was mainly due to two factors – revenue growth, and lower operating expenses as a % of revenues. Further, the build-up in provisions for credit losses was the biggest reason behind the drop in profitability figures for Goldman’s peers in 2020. While its provisions for credit losses did increase from $1.1 billion to $3.1 billion in the year, to compensate for the higher loan default risk, the figure was still significantly lower than its peers (e.g. JPM’s provisions were around $17.5 billion in 2020) due to GS’ smaller consumer banking operations as compared to other banks. We expect the same trend to continue in the first quarter.
Given the expected mass distribution of the Covid-19 vaccine and potential improvement in the economic conditions, provisions for credit losses are likely to see some favorable decrease in the coming months. Further, the operating margin is likely to see some improvement in the year. This will boost Goldman’s profitability and enable the bank to report an EPS of around $32.76 in FY2021.
(3) Stock price estimate 12% more than current market price
Going by our Goldman Sachs valuation, with an EPS estimate of around $32.76 and a P/E multiple of just above 11x in fiscal 2021, this translates into a price of $366, which is 12% above the current market price of around $327.
Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year
Think Bitcoin could disrupt the banking industry? Looking for upside from Bitcoin adoption, without buying into the cryptocurrency itself? Check out our theme on Cryptocurrency Stocks