Goldman Sachs ($GS) is a titan in investment banking, but is its stock a bargain at $624.17? Using Warren Buffett’s Discounted Cash Flow (DCF) and the McGrew Valuation Method, I’ve crunched the numbers to uncover GS’s intrinsic value and assessed its Return on Equity (ROE) and Return on Tangible Net Equity (ROTNE). The results suggest GS could be a Screaming Buy with solid returns, making it a compelling pick for value investors. Let’s break it down.
Valuation: Is GS Undervalued?
To estimate GS’s intrinsic value, I applied two rigorous valuation methods, leveraging five years of financial data (2020–2024) from SEC filings. The Buffett Valuation Method projects free cash flow (FCF) over 10 years, while the McGrew Valuation Method adjusts growth rates for dynamic firms. Here’s the data foundation:
- FCF (2020–2024): -$20.037B, $17.360B, $23.125B, -$14.903B, -$24.497B. Volatility, with negative FCF in three years, reflects GS’s cyclical business. I used 2022’s $23.125B as the starting point, assuming a recovery.
- Shares Outstanding: 310,653,708 (Q1 2025).
- Closing Price: $624.17 (June 11, 2025, verified via Yahoo Finance and Google Finance).
- Growth: Negative FCF made CAGR unreliable, but a 2021–2022 CAGR of 7.4% and industry growth forecasts (8–10%) led to a conservative 5% growth assumption.
Buffett Valuation:
- Projected FCF at 5% growth (stable stock, as CAGR <10%) to $37.668B in Year 10.
- Terminal value: $701.998B (2.5% perpetual growth, 8% discount rate).
- Discounted present value: $523.903B.
- Intrinsic value per share: $1,686.75.
- 25% margin of safety: $1,265.06.
McGrew Valuation:
- With CAGR <10%, it mirrored Buffett’s parameters, yielding the same $1,686.75 intrinsic value and $1,265.06 margin of safety.
Valuation Status: At $624.17, GS is well below the $1,265.06 margin of safety, earning a Screaming Buy rating for both methods. This suggests the stock is priced at ~37% of its intrinsic value, offering significant upside potential.
Returns: How Profitable Is GS?
I also calculated GS’s ROE and ROTNE to gauge its efficiency in generating profits from equity:
- TTM ROE (ending Q1 2025):
- Net income attributable to common shareholders: $14.177B ($14.882B TTM net income minus $705M preferred dividends).
- Average common equity: $107.978B (five quarters, Q1 2024–Q1 2025).
- ROE: ($14.177B / $107.978B) × 100 = 13.13%, up from 12.7% in 2024, reflecting strong Q1 2025 earnings ($4.738B).
- Annualized ROTNE (Q1 2025):
- Annualized net income to common shareholders: $18.332B ($4.583B quarterly, post-$155M dividends, × 4).
- Average tangible common equity: $102.225B (Q4 2024–Q1 2025).
- ROTNE: ($18.332B / $102.225B) × 100 = 17.93%, higher than the 16.9% ROE reported, as tangible equity excludes intangibles.
These returns highlight GS’s ability to deliver robust profits, with ROTNE outperforming ROE due to a leaner equity base.
Why GS Stands Out
A Screaming Buy at $624.17, coupled with a 13.13% ROE and 17.93% ROTNE, positions GS as a value and performance standout. The stock’s low price relative to its $1,686.75 intrinsic value suggests market pessimism may have overshot, especially given GS’s growth potential in wealth management and investment banking. However, FCF volatility—driven by trading and loan fluctuations—demands caution. Negative FCF in 2023–2024 could persist in a downturn, but historical cycles show recovery potential.
Assumptions and Risks
- FCF: Used 2022’s positive FCF, assuming normalization, but prolonged negative FCF could lower value.
- Growth: 5% growth is conservative; a stronger economy could boost GS.
- Data: Sourced from SEC filings, cross-checked with Yahoo Finance. Quarterly FCF may miss annual nuances.
- Market: The June 11 price may shift, and economic shifts could impact GS.
Takeaway
Goldman Sachs at $624.17 is a Screaming Buy with an intrinsic value of $1,686.75, backed by strong 13.13% ROE and 17.93% ROTNE. Value investors should weigh its cyclical risks against its deep discount and profitability. Is GS your next portfolio star? Dig deeper, but the numbers are hard to ignore.
Disclaimer: This is not financial advice. Always conduct your own research and consult a financial advisor before investing. Past performance does not guarantee future results, and calculations involve assumptions that may not hold.
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