The stock rose 2% to $218 a share Wednesday.
Here were the results against Wall Street expectations:
- Revenue: $13.3B v. $9.7B (actual result: +41% year-over-year)
- Return on Equity: 11.8%
- Net Income: $2.4B
- Provision For Credit Losses: $1.5B (7.4 times last year’s result)
- Earnings Per Share: $6.26 v. $3.78 (+7.7% YoY)
- Investment Banking Revenue: $2.66B (+36% YoY)
- Trading Revenue: $7.17B (+92% YoY)
- Net Interest Income: $944M (-11.8% YoY)
Net interest income, which is income on interest revenue after interest paid to depositors and lenders, is only about 8% of total company revenue. Out of all U.S. large cap banks, Goldman Sachs is one of the least impacted by hits to loan demand and net interest margins, or the profitability of each loan.
Goldman’s strong performance reflected its surge in debt and equity underwriting. Debt underwriting specifically saw an incredible surge as U.S. companies issued $1 trillion of investment grade debt in May, against $975 billion in all of 2019, as companies shored up liquidity at historically low rates after the Federal Reserve had begun easing financial conditions. Volatile markets can also pose opportunities for trading operations for investment banks like Goldman.
Fundamentally, the earnings outlook looks stable, as Goldman has shown its ability to service companies in a variety of ways as the globe goes the though economic pain. Goldman mentioned the uncertain economic environment, but also issued its normal quarterly dividend and made no mention of any headwinds to that dividend, underscoring the bank’s strong financial position.
Now, the stock is trading at a touch under its book value per share, compared to a 5-year historical average of the stock trading even with book value. Potential valuation expansion aside, the stock could conceivably move up about 13% through 2021, if current estimates hold strong.
And for the moment, analysts could easily revise upwards. Analysts are looking for growth in book value per share of 9% from present to the end of 2021. If Goldman trades at book value, which FactSet consensus estimates say could hit $248 by the end of 2021, the stock would move up to around that level.
A few problems to this thesis: the continued return of the virus pressuring the economy and pressuring deal volumes and the fact that some of Goldman’s businesses, like trading are volatile, which may hold upward revisions to estimates back a bit. Results in trading may not run at the rate they did this past quarter. Securities underwriting also saw outsized demand this quarter.