The mood in 1Q19 was set by low market activity, driven in part by unfavorable near-term factors like the Brexit drama, trade and economic growth challenges in China and even the government shutdown in the United States. As a result, all major business segments -- with the notable exception of investment banking, which was supported by Goldman Sachs' strong M&A franchise -- saw a double-digit percentage decrease in revenues year-over-year.
Shares of Goldman were down 2.9% to $201.74 on Monday morning, but are still up roughly 21% so far this year, compared to a 16% increase for the S&P 500.
Perhaps standing out the most was the challenged fixed income, currencies and commodities (FICC) business, representing a sizable one-fifth of the quarter's total revenues but down 11% over 2018 levels. To make matters worse, the sub-segment is unlikely to see much uplift in the foreseeable future, as the bank has reaffirmed its commitment to weed out weak performers (particularly in, but not limited to, commodities) and reduce the business' footprint throughout the next several months.
Looking Forward, Not Backwards
But fortunately for shareholders, Goldman Sachs' key story seems to transcend the results of the most recent quarter. Sensing the need to shake things up, the company continues its "front-to-back" strategic business review with an eye to growing addressable markets, investing in automated platforms and diversifying capital sourcing.
Results from the transformation have yet to manifest themselves in the business structure or in the financial statements, as the process appears to be incipient and long-lasting. But the opportunities look encouraging.
During the earnings call, the management team spoke of the company's focus on growing the smaller-to-mid-sized investment banking client base, as well as the opportunity to tap a large pool of consumer deposits that Goldman has traditionally left untouched. The early-days success with the Marcus initiative and the upcoming launch of the credit card partnership with Apple (AAPL - Get Report) are only a few examples of the direction that the investment banking powerhouse seems to be heading over the next few quarters.
A Low-Stakes Bet
It is hard to think of Goldman Sachs as an underdog in the financial services world. However, this is the position that the company has agreed to take, to some extent, in order to boost its top- and bottom-line growth potential. The company's current business transformation efforts could lead to more diversified and more predictable revenue streams, a departure from the traditional Goldman Sachs model that now seems a bit too exposed to unfavorable market forces that are outside the company's control.
I have not always favored investing in Goldman Sachs, believing that a better-diversified approach to playing the financial services sector made more sense at what seems to be the peak of an economic cycle. However, Goldman Sachs' stock looks more enticing today as the opportunities that lie ahead do not seem to be priced into the shares.
A forward P/E ratio of 8.6x is about as low as the multiple has been in the past 18 months at least, despite a strong brand, robust balance sheet and earnings growth expectations that are still far from concerning.
With the bank's announced first quarter 2020 strategic update as a clear catalyst in the horizon, competent execution of Goldman Sachs' business reinvention plans could propel the stock well above current levels within the next 12 months.