Goldman Sachs has lost its luster. The firm earned a best-in-class reputation for its history of profitability and navigating upheaval. But it seems less assured lately. In fact, Goldman is in danger of looking downright average.
It’s not the first time. Goldman has been sent reeling by shocks, from Penn Central’s bankruptcy in 1970 to Russia’s default in 1998. But the Goldman advantage comes from an ability not only to climb off the canvas but to thrive in the face of adversity.
Today’s investors are expressing doubt, or at least not giving the firm led by Lloyd C. Blankfein the benefit of it. Over the last decade, Goldman’s shares have outperformed those of the biggest American banks, including JPMorgan Chase and Morgan Stanley, as well as the Standard & Poor’s 500-stock index. But they have tumbled 16 percent this year, lagging rivals and the broader market.
One reason is Goldman’s struggle to get out of the headlines and clear its name in Washington even after last year’s record $550 million settlement with the Securities and Exchange Commission. The bank still faces the possibility the Justice Department will come after it or some of its people. Two analysts cut their ratings on Goldman’s stock last week for that reason.
Goldman’s gold-plated advisory business has been disappointing, too. For example, instead of its normal perch atop the United States merger rankings, nearly halfway through the year it ranks a dismal sixth, according to Thomson Reuters. That may help explain Monday’s reshuffle at the firm’s investment bank.
The company is not even so sure of itself anymore. Top executives told Barclays Capital last week that uncertainty about financial reform meant it could not stand by its long-term high-teens target for return on equity.
And while Goldman still commands a valuation premium to its largest rivals, it is trading at just 1.1 times book value. That implies it will barely cover its cost of capital. Five years ago, around the peak of the boom, Goldman fetched 2.6 times book, nearly twice JPMorgan’s multiple.
The advantage has shrunk to just 10 percent, only part of which can be put down to the compression associated with an industrywide bad patch.
Goldman and its supporters can argue the naysayers merely see the glass half empty. But to truly shine again, Goldman’s glass needs to be more than just half full.
Beware of Bubbles
It’s easy to make the parallel between today’s Internet stock frenzy and the bubble that popped a decade ago. But a comparison to the more damaging credit boom may be appropriate too. As they did amid dot-com mania, investors are taking big risks without clear rewards and signing their rights away.
The latest illustration comes courtesy of LinkedIn, the social network with a big following among those out of a job or looking for a new one. The company supersized the price of its initial public offering by 30 percent, giving the firm a potential value of as much as $4.3 billion when the I.P.O. prices, probably late on Wednesday.
At the top of the range, LinkedIn would fetch a valuation of 15 times trailing 12-month sales, or about 82 times earnings before interest, taxes, depreciation and amortization. Even assuming its growth trajectory continues over the next year, the I.P.O. would value LinkedIn at nine times future sales and nearly 70 times estimated Ebitda.
If LinkedIn’s chief executive, Jeff Weiner, can keep the company expanding at a similar pace for a few years, the company might grow into the value investors seem willing to accord it now. But that does not offer much upside and takes little account of LinkedIn’s risks, which are amply laid out in its prospectus.
LinkedIn’s debut also brings an extra frisson of danger that recalls the credit bubble that burst in 2008. Back then bondholders, in their headlong drive for yield, surrendered many of their covenants, the rules that determine what borrowers must or must not do. LinkedIn is asking investors to abdicate similar rights.
The shares the company is selling carry only a sliver of the voting power of Class B shares that LinkedIn founders, managers and staff own. This group will hold approximately 99.1 percent of the voting power after the I.P.O.
True, the mighty Google did a similar thing when it began to trade a few years after the dot-com bust. But LinkedIn is no Google. It may turn into another reminder that in bubbles investors give up too much today for the lure of riches tomorrow.
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