Goldman Sachs (GS.US) recently closed at $893.48. The stock has gained 0.6% over the past week, 15.4% in the last month, and an impressive 55.4% year-to-date, with a one-year return of 61.1%. Moreover, its three-year cumulative return stands at 178.8%, while the five-year return has soared to 292.8%.
Given such substantial gains, investors may wonder whether buying Goldman Sachs stock now remains a prudent decision—or if the rally is nearing its end, leaving late entrants exposed to heightened risks.
The surge has been driven by optimism surrounding Goldman Sachs' business strategy. Specifically, the market is bullish on its expanding wealth management and trading operations, as well as its renewed focus on institutional and investment banking (moving away from its earlier consumer banking experiments). Additionally, growing investor interest in management’s strategic shifts and capital return plans has further fueled the rally.
Despite the bullish sentiment, Goldman Sachs' valuation presents a mixed picture—half of the metrics suggest undervaluation, while the other half indicate fair pricing. Below, we analyze the stock using different valuation approaches.
**Method 1: Excess Returns Model** This model evaluates whether Goldman Sachs can consistently generate returns above its cost of equity. The key question is whether each dollar of book value can earn more than the cost of equity over the long term.
- Goldman Sachs' book value per share is $348.02. - Based on 13 analysts' weighted forecasts, its "sustainable EPS" is $58.80. - Using an average ROE of 15.26% and a cost of equity of $48.16 per share (~13.8% cost rate), the model calculates an excess return of $10.64 per share, indicating the bank can sustainably outperform its financing costs. - 15 analysts project long-term book value will rise to $385.29 per share.
Combining these factors, the intrinsic value under this model is approximately $500.45 per share—suggesting the stock is overvalued by ~78.5% at its current $893 price. **Result: Overvalued**
**Method 2: P/E Ratio** For a profitable and mature firm like Goldman Sachs, the P/E ratio directly links the purchase price to current earnings. Faster-growing, lower-risk companies typically command higher P/E multiples.
- Goldman Sachs' current P/E is 17.75x, below the capital markets industry average of 25.06x and the broader peer average of 30.41x, implying a market discount. - Simply Wall St's proprietary "Fair Ratio" assessment, which considers growth, earnings quality, risk, industry position, and market size, suggests a fair P/E of 19.18x for Goldman Sachs. - At 17.75x, the stock appears slightly undervalued relative to this benchmark. **Result: Undervalued**