Goldman Sachs (GS) Stock May Trade At A Discount Despite CEO Succession Plans

Goldman Sachs Group has delivered a very strong 3 year share price run, which puts a spotlight on whether the current valuation is properly supported by the returns it earns on its capital. With the stock recently trading around US$896.67 and a string of headline developments in the background, the core issue for investors is what those capital returns really justify today.

• Over the past 3 years the Goldman Sachs Group share price has gained about 208.7%. The key question is whether the underlying returns on capital are strong and durable enough to support that kind of repricing.
• Leadership succession planning, including reports that President and COO John Waldron may eventually take over as CEO with a tilt toward asset and wealth management, can influence how efficiently Goldman redeploys capital into fee based and capital light activities that affect its future return profile.
• Prefer to judge Goldman Sachs Group on earnings? See what Goldman Sachs Group's 13.6x P/E says about the price.

The issue now is whether the returns Goldman Sachs Group earns on its capital make the current share price look well supported or stretched when set against that record of performance.

If you want to stress test whether Goldman Sachs Group's 3 year rerating and capital returns look unusual, line it up against the 28 high quality undervalued stocks.

Does Goldman Sachs Group Look Undervalued on Excess Returns?

The Excess Returns model looks at how much profit Goldman Sachs Group generates above the return that equity investors require. In this framework, the bank’s capital base and earnings power are used to assess whether the current US$896.67 share price is conservative or optimistic.

Goldman Sachs is modeled with a Book Value of $362.05 per share and a Stable EPS of $76.03 per share, both informed by estimates from 13 analysts. The Cost of Equity is put at $37.75 per share, while Excess Return is $38.28 per share, implying that modeled earnings exceed the required return on capital by a meaningful margin. That is supported by an Average Return on Equity of 18.77% and a Stable Book Value of $405.11 per share, which together suggest the firm is expected to keep compounding its equity base rather than simply maintaining it.

Because the Excess Returns projections put Goldman Sachs Group's estimated intrinsic value meaningfully above the current share price, the model implies the market is not fully reflecting these modeled excess profits in the US$896.67 quote. The reported plan for a CEO handover to John Waldron, with a tilt toward asset and wealth management, helps explain why some investors see those excess returns as potentially durable even through a leadership transition. Find out what Goldman Sachs Group could be worth using our Excess Returns estimate.

The Goldman Sachs Group Narrative: What Would Justify Today's Price?

Simply Wall St Narratives for Goldman Sachs Group pick up where the valuation puzzle leaves off by spelling out which future outcomes on growth, margins and earnings would need to hold for the shares to be worth materially more or less than today’s price. Instead of a single output from a ratio or model, Narratives map the future that output relies on so you can watch how Goldman Sachs Group's real world progress lines up with those assumptions over time on the Community page.

Community views on Goldman Sachs Group split between those who see more to the story than the current quote reflects and those who see expectations as already demanding.

Bull case: 21% undervalued

"Firmwide technology and AI investment, reflected in lower headcount even as revenues grow and in management commentary on AI and process reengineering increasing productivity..."

Discover why this Narrative puts Goldman Sachs Group at 21% undervalued.

Bear case: roughly fairly valued

"Goldman Sachs faces long-term earnings headwinds as rising digitization and the proliferation of fintech disruptors are expected to steadily erode the firm's margins across investment banking, trading, and wealth management..."

Explore why this Narrative puts Goldman Sachs Group at roughly fairly valued.

Before you act on Goldman Sachs Group's valuation, there is one more lever to inspect

Price, profits and models only tell part of the story for Goldman Sachs Group, since the people steering the firm and the way their pay is structured can quietly tilt long term outcomes in very different directions. See who runs Goldman Sachs Group and how they are paid.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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