Goldman Sachs: Reducing Fair Value Estimate as We Forecast Lower Revenue Growth and Margins

We are decreasing our fair value estimate for narrow-moat-rated Goldman Sachs GS to $368 from $410 per share. This is about 12.5 times forward earnings and 1.3 times tangible book value. Earnings since our previous valuation update were more than offset by a lowering of our forecast growth for net interest income and lower operating margins. Our base case has net revenue growing at a compound annual growth rate of around 1% over the next five years, operating margins of 37.5%, and returns on tangible common equity of around 12.5%. The company has an operating margin goal of around 40% and return on tangible common equity goal of 15% to 17%.

Goldman Sachs had been building businesses for noninstitutional clients but has drastically pared down its ambitions. It has found or is finding new homes for United Capital and GreenSky that it had acquired several years ago to provide wealth management and installment lending to more main street customers. While we didn’t view these acquisitions as needle movers for profitability, they were steps toward diversifying the business and fit in with trends that the market had rewarded at peers. The acquisitions, divestitures, and decreased profitability from newer initiatives muddied the company’s investment narrative and financial statements. With Goldman refocusing, it will revert to mainly being valued as a relatively volatile investment bank.