It’s all about the Benjamins. Goldman Sachs doesn’t sell anything, they just make money, from money and they do it very aggressively. Goldman takes your money and turns it into more money. They borrow money, and turn it into more money. If there is a corporate merger, acquisition or Initial Public Offering, Goldman brokers the deal and charges the corporations lots of money. Money, Money, Money - earn it, print it, trade it, manufacture it - the Goldman Sachs business model since 1869.
Goldman Sachs operates through three business segments
1. Global Banking and Markets - provides strategic financial advisory services related to Mergers and Acquisitions, Initial Public Offerings, Restructurings, Spin-offs, secured lending and financing.
2. Asset and Wealth Management - Assets management includes equity, fixed income, hedge funds, credit funds, private equity, real estate, currencies, and commodities. Wealth Management includes customized investment and wealth advisory solutions, personalized financial planning, and private banking services, as well as investments in corporate equity, credit, real estate, and infrastructure assets.
3. Platform Solutions - offers credit cards and point-of-sale financing for purchase of goods or services. This includes the Apple partnership for the Apple Credit card program.
CHOOSING THE RIGHT STOCK
When considering an investment in any company, the Investment Thesis has to be considered within the context of three areas.
Best-in-Class - Goldman Sachs is ranked as the #1 most prestigious banking firm and the premier high-net-worth franchise. They are the #1 Merger and Acquisition advisor, a leading global active asset manager and a top five alternative asset manager with a diverse portfolio of $3.8T globally under supervision.
Secular growth trend - The rich get richer and more people are getting rich. The number of high net worth individuals is growing at an exponential rate globally and they look towards asset managers to protect, grow and accelerate that wealth.
Strong Economic Environment - As of January 2025, the US economy is one of the strongest globally. The US Federal Reserve, to date, has procured a ‘soft economic landing’, inflation has declined, interest rates are declining at a measured pace with expectations to continue. The Q4 2024 Vistage CEO Confidence Index trend reports 76% of CEO’s expect increased revenues in the year ahead, 61% expect increased profits and 65% are planning to add personnel. These are 13% - 15% increases - numbers not seen since 2017 - which are attributed to the 2025 change in US Presidency.
INVESTMENT THESIS
The Investment Thesis for Goldman Sachs is founded on three pillars.
1. It takes money to make money
- Nationalist economic strategies designed to keep US money in the US, incentivize small and medium sized businesses towards investment and individuals towards entrepreneurship with the goal of growing and strengthening the US economy
The 2025 economic strategies are expected to include;
- reduced government regulation on business and financial institutions - increases capital available for investment activity.
- reduced restriction on merger and acquisition activity - approvals assessed on the business viability will lead to increased M&A activity and successful deal closure.
- downward political pressure on interest rates - lowers the cost of borrowing and increases ‘leverage’ for investment.
- tax incentives for business and individuals - stimulates small and medium business investment
- Strengthening of the US military and national security - Cybersecurity and equipment procurement.
2. Returns to Shareholders - Dividends provide a financial return on invested capital. A share repurchase program provides a company the ability to defend itself against shortseller attacks to drive the share price down. Corporations will use share buyback strategies by buying shares when prices decline below what the company considers a fair value. In Q4 2024, Goldman Sachs paid out $965M in dividends to shareholders and bought back $2B worth of shares (3.5 million shares total) at an average price of $566. The total return to Shareholders in 2024 was $11.8B. 68% of that was in the form of the share repurchase program.
3. Revenue, Efficiency and Cost Reduction - In Q4 2024 Goldman reported a full year 2024 pre-tax operating margin of 28% (an 18% increase over the reported 2023 operating margin of 10%) and Return on Equity (ROE) of 12.7%. The company has a strategy to improve the durability of revenues while lowering costs with the objective to obtain a mid teens Return on Equity in 2025. This strategy includes
Winding down the Apple Card partnership with Apple in Goldmans Platform Solutions segment. This was a negative on the 2024 financial results, it is expected to be breakeven in 2025 with profitability in future years. However CEO Soloman stated, “Whether it’s [terminated] in the medium term or through the life of the contract, that’s not going to be a long-term business for the firm,”
Operating efficiencies include Organizational Structure to expand key markets and streamline processes, Spend management through optimized transaction based expenses and efficient management of consultants and vendors, Automation to simplify the technology stack and leveraging AI to transform business technology.
Improving revenue streams - The baseline foundation of revenue from advisory, underwriting and mediation combined with the contribution from increased durable revenues from financing, management and private banking and lending combine to form 70% of revenue and act to offset the effect of a downturn in any one of those areas. Diversification of revenue acts to capture the upside when opportunity presents.
CATALYST
There is also a significant catalyst. Each June, financial institutions are required to meet a ‘stress test’ in which the US Federal Reserve creates a fictitious economic event. This was a result of The 2009 financial crisis. Since the 2025 presidential election, a number of institutions have cooperated on suing the US Federal Reserve on the annual Financial Stress Test regulation citing a lack of transparency on the requirement selection criteria and the negative effects of requiring institutions to carry more capital than would otherwise be required. If successful, this would free up significant amounts of capital for lending.
RISKS
There are risks to an investment in Goldman Sachs
- Trump commentary will cause short term distractions or ‘noise’ to financial markets.
- Geopolitics may affect key markets Goldman operates in.
- Global economic decline
- Access to financing or liquidity issues in the financial industry
What does that mean at stockmarketHQ
It takes money to make money.
In a strong economic environment where financing is affordable and accessible, small, medium and large businesses have the confidence to make investments to expand their businesses or buy other companies. This is reflected in the CEO Confidence Index.
Government strategies that reduce restrictions/regulation frees up the flow of capital. Normally it wouldn’t be advisable to make an investment on the basis of a change to any single government regulation. However, the opportunity presented by the number of changes across the board that play right into the sweet-spot of Goldmans business model has to be fully considered.
The deep pockets of Goldmans share repurchase program allows them to defend its stock price (and thus shareholder investment/value) against short seller attacks, providing an underlying level of security. The average share repurchase price, reported by the company in the quarterly earnings reports, reflects the price Goldman sees as undervalued and provides a reference as an accumulation or entry price as well as a Stop Loss price. In Q4 2024 this price was reported as $556
2024 operating margins at 28% and 12.7% Return on Equity (ROE) are significant in the finance industry. Strategies to improve revenue streams, develop operating efficiencies and wind down non-performing partnerships such as the Apple Card will work towards achieving Managements guidance of a Mid-Teens ROE target.
The risks can be summed up simply.
Ride the money train as long as the money flows.
If the flow of money slows, get out. Remember, it takes money to make money.
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