It is shaping up to be a massive year for initial public offerings (IPO). SpaceX recently confirmed that it plans to go public next month in what is expected to be the largest IPO ever, with Goldman Sachs (GS +0.87%) serving as the lead underwriter.
Over the past year, capital markets activity, which includes IPOs and mergers and acquisitions (M&A), has picked up amid strong public markets and a favorable regulatory backdrop. Goldman Sachs posted excellent first-quarter results, and the stock rose modestly after the earnings report. With that said, I think the investment bank stock could be a better buy than Wall Street thinks. Here’s why.
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Dealmaking activity continues to accelerate
Goldman Sachs is one of the largest investment banks in the United States and leans heavily on capital markets for its business. The bank struggled a few years back, when capital markets activity slowed to a crawl while its consumer banking business struggled. The culprit was high interest rates and heavy regulatory scrutiny, which made companies more hesitant about pursuing major deals or IPOs.
Over the past year, companies have found it easier to make deals thanks to faster regulatory approvals and strong equity markets. Streamlined regulatory processes have helped boost deals and enabled investment banks to get things done faster than expected, months ahead of schedule.
Today’s Change
(0.87%) $8.56
Current Price
$996.73
Key Data Points
Market Cap
$294B
Day’s Range
$990.90 – $1005.36
52wk Range
$592.17 – $1005.36
Volume
1.9M
Avg Vol
2.2M
Dividend Yield
1.56%
In December, Goldman Sachs closed out the year with its largest backlog in over four years, showing that markets have finally opened up, paving the way for mega-IPOs and mega-mergers. The company posted blowout earnings in the first quarter, as equity underwriting revenue rose 45% year over year to $535 million, while advisory revenue surged 89% to $1.5 billion.
Goldman Sachs has a “very full pipeline” of deals
Even though Goldman saw impressive growth, CEO David Solomon noted that there was an “extraordinary replenishment” of its backlog and noted that it has a “very full pipeline” of large-scale deals to be made. One driver of the surge is mega-deals, as many companies have stayed private over the past several years and have finally reached a point where they are massive in scale and need to access capital markets.
On top of that, equity markets have remained resilient despite geopolitical uncertainty, providing a favorable backdrop for companies to go public. According to Renaissance Capital, 99 IPOs have been filed this year, up 6% from last year. Meanwhile, IPOs have raised $28.8 billion in proceeds, up 160% year over year.
Expect strong capital markets activity to persist through this year
Looking ahead, Goldman Sachs expects capital markets activity to remain robust, driven by strong dealmaking and a more favorable regulatory backdrop. Analysts forecast Goldman’s earnings per share (EPS) growth of 21% this year, building on the strong growth over the last couple of years.
David Solomon has previously described the current environment as a “highly constructive setup” and “cyclical upswing” and expects investment banking activity to accelerate as the year goes on. With such strong tailwinds still behind IPOs and M&A deals, Goldman Sachs looks like an excellent stock to buy today to capitalize on this strength.
