1 Valuable Thing We Just Learned About Goldman Sachs

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Goldman Sachs (NYSE: GS) took no prisoners in the first quarter of the year, which completely dashed all earnings expectations in the company’s best quarter. The investment bank reported profit of $ 6.8 billion, or $ 18.60 in earnings per share (EPS), on total revenue of $ 17.7 billion. On average, analysts expected Goldman to post EPS of $ 10.22, so that was really a huge beat.

Today, Goldman’s core business has long been investment banking and trading, which can be extremely volatile. And while the pandemic has resulted in high business activity for most investment banks, I think a very valuable thing we’ve just learned about Goldman is that income and profit levels are likely to drop. normalize above pre-pandemic levels.

Business growth in place

At Goldman’s Investor Day in January 2020, management said that one of the bank’s medium-term goals is to grow the business in place in its investment banking, global and global markets. other existing businesses $ 2-3 billion.

At the time, management probably had no idea what was going to happen in the world. Goldman evidently had no trouble hitting that target this year, with net sales of $ 17.7 billion in the first quarter alone, more than double that of the first quarter of 2020. But that is clearly not a normal rhythm. The pandemic has boosted everything Goldman does, whether it’s exploding underwriting or trading fees, or large gains in its private equity portfolio.

Photo of the building with the word bank on it.

Image source: Getty Images.

However, one analyst noted on recent Goldman results that the bank’s market share gains and the growing industry fee pool in investment banking are expected to support a higher execution rate of 3. billion dollars in investment banking and trading revenues. This makes the $ 2-3 billion target set on Investor Day actually “pretty conservative” when you consider other companies. Bank made gains. Goldman CEO David Solomon responded by saying he felt “extremely confident” in the bank’s ability not only to meet the medium-term goals set on Investor Day, but also to achieve them. exceed in the long run.

SPAC

Perhaps the other supporting theme in the rise in normalized income at Goldman is the commentary regarding Special Purpose Acquisition Companies (SPACs). PSPCs are shell companies that go public for the specific purpose of merging with a private company and making it public, usually within two years. Many investment banks have benefited enormously from their role as underwriters with PSPCs. There were 248 SPAC registrations in 2020 and over 300 more so far in 2021, according to SPAC Research. But since that time, new PSPC registrations have slowed down, largely due to closer scrutiny from regulators.

First, Mr. Solomon said that while he believes the industry will evolve, he also believes that PSPCs are here to stay to allow companies to access government procurement. Second, while Goldman has been successful in capturing market share in the PSPC space, PSPCs did not represent too much of the overall business activity.

Solomon said PSPCs represented a single-digit percentage of merger and acquisition (M&A) activity the company was involved in in the quarter, and less than 15% of equity capital markets revenue in the last quarter. With all of the PSPCs now available in the market and the incentives for the management of those vehicles to strike a deal and merge with a company, the PSPC business is expected to continue to benefit Goldman’s M&A business.

Ever higher income

Like other investment banks, Goldman has seen tremendous revenue growth as the pandemic has boosted investment banking activity. While first quarter revenues and profits are set to normalize and decline, it was interesting to learn that income levels are expected to end up being higher than they were before the pandemic. Not to mention all the work Goldman has done to grow its consumer banking and asset and wealth management division, all of which generate more stable income. So while we don’t yet know exactly what a normal rate of income will look like for Goldman, it certainly looks like it has a very positive trend.

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Bram berkowitz has no position in any of the listed securities. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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