Goldman Sachs Stock Drops Despite 54% Earnings Jump: Time to Buy?

• Goldman Sachs reported a 54% increase in earnings in Q3.
• The firm got a lift from rising investment banking revenue.
• The stock was trending lower on Tuesday. Should investors buy the dip?

The leading investment bank had a blowout quarter, topping estimates

Goldman Sachs (NYSE:) reported healthy third-quarter earnings Tuesday, led by significant gains in investment banking.

In the third quarter, revenue jumped 7% year over year to $12.7 billion, which was substantially higher than the $11.8 billion that had been estimated by Wall Street analysts.

Net income rose a whopping 45% to $2.99 billion, while earnings per share surged 54% to $8.40 per share, buoyed by an 8% decline in operating expenses compared to Q3 2023.

Goldman Sachs’ stock was up about 3% in pre-market trading but then flattened out after the markets opened. As of 10:30 a.m. ET it was trading at just over $518 per share, down about 1% for the day. The stock price has gained approximately 34% year-to-date.

Let’s take a closer look at the third quarter results and see if Goldman Sachs stock is worth a buy on the dip?

Investment Banking Revenue Jumps 24%

Goldman Sachs is considered a bellwether for investment banking and mergers and acquisitions as the leader in this space, by most measures. Also, because investment banking makes up more of its total revenue than its other major competitors, Goldman’s stock tends to react more than others to investment banking results.

That’s played out this year, as Goldman Sachs stock has outperformed its more diversified competitors, led by a resurgence in investment banking after two of the worst years in recent history.

In Q3, its Global Banking and Markets division saw revenue climb 12% year over year to $26.5 billion, but drilling down a bit within this segment, its investment banking fees soared 24% to $5.7 billion. Debt underwriting rose 41% year over year while equity underwriting surged 31%.

Goldman Sachs’ other major business line Asset and Wealth Management also had a strong quarter, with revenue up 20% to $11.4 billion. This business has benefitted from the two-year bull market, as rising markets create higher returns and asset levels, which generates higher fees, and inflows.

“Our performance demonstrates the strength of our world-class franchise in an improving operating environment,” Goldman Sachs Chairman and CEO David Solomon said. “We continue to lean into our strengths – exceptional talent, execution capabilities and risk management expertise – allowing us to effectively serve our clients against a complex backdrop and deliver for shareholders.”

The strong bottom-line results, showing a 54% increase in earnings per share to $8.40 per share, were aided not only by higher revenue, but lower operating expenses.

Operating expenses were down 8% driven by a 59% drop in depreciation and amortization costs related to several factors, including the sale of GreenSky in the same quarter a year ago, along with consolidated real estate investments.

Time to Buy?

Goldman Sachs’ performance is generally representative of the strength of the economy, which is in pretty good shape right now. While the company did not offer an outlook for Q4 in its earnings presentation, it should continue to outperform in the near-term.

Declining interest rates are expected to boost mergers and acquisitions and investment banking revenue, unleashing pent-up demand. However, the asset and wealth management side of the equation is a bit more uncertain, as stock valuations remain high and could correct.

Goldman Sachs stock remains a pretty good value, with a forward P/E ratio of just 13. Market analysts rate it as a consensus buy, but its median price target of $522 per share suggests just a 5% increase.

Tuesday’s slight post-earnings drop has more to do with macroeconomic issues, like a drop in oil prices and news that the Biden Administration is considering a cap on overseas semiconductor sales.

Investors should consider any dip in Goldman Sachs’ stock price an opportunity to buy. One big reason right now is because Goldman Sachs is a market leader and it should see increased activity on the M&A front in this falling rate environment, offsetting any market corrections that may lie ahead.

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