Goldman Sachs stock not ideal 'at today's price': Strategist

On today's edition of Good Buy or Goodbye, Market Domination's Julie Hyman is joined by Great Hill Capital Chairman and Managing Member Thomas Hayes to delve into his top portfolio moves in the fintech landscape when compared to traditional banking options.

Hayes recommends PayPal (PYPL) as a stock to buy, citing the appointment of the company's new CEO Alex Chriss as the source of optimistic upside. He highlights Chriss's experience from his previous role at Intuit (INTU), noting that the valuable lessons learned there can be brought to PayPal "to revitalize the brand."

Additionally, Hayes points to the re-rating that has occurred on the stock as margins reaccelerate, evident from PayPal's impressive first-quarter earnings beat. Furthermore, he emphasizes that the company generates around $5 billion a year in free cash flow, providing PayPal with "all the runway they need."

On the other hand, Hayes names Goldman Sachs (GS) as a stock that investors should avoid, despite his favorable view of the major bank. He acknowledges that he doesn't like the stock "at today's prices" and its excessive dependence on trading profits.

Hayes states that Goldman Sachs' attempts to generate revenue through other avenues have not been as successful, highlighting the need for the company to spend time "building out the recurring revenue businesses" they have. Lastly, Hayes believes an interest rate cut from the Federal Reserve would be wholly necessary for Goldman Sachs to see significant gains based on its investment banking franchise.

Catch more of Yahoo Finance's Good Buy or Goodbye, or watch this full episode of Market Domination.

This post was written by Angel Smith

Video Transcript

It's a big, noisy universe of stocks out there.

Welcome to goodbye or goodbye.

Our goal.

To help cut through that noise to navigate the best moves for your portfolio.

Today we're dissecting the battle of financial services between versus traditional banking.

Joining me here to discuss is Great Hill Capital chairman and member Thomas.

Hey, Tom, good to see you.

Great to be here.

What they call TR.

Five versus Fintech, I guess if you're in certain segments, but let's get to the fin first because that is the stock that you like, although it's sort of an older one in the universe of Fintech, and that is PayPal.

The stock has had a bit of a rocky run, but let's get to why you like it.

First of all, there's a new CEO, and there's been a lot of optimism sort of baked in there with the company coming out with its latest results.

Yeah, Andrew Chris came from into it, so he ran the small business division at into it, which was 50% of the revenues.

While he ran that division, the was a 40 bagger over just over a decade, so he's bringing some of that experience to PayPal To revitalise the brand, he put out the six initiatives, which he said was gonna shock the world.

It fell a little flat, except for the fact that he's delivering on it.

We saw them.

He set expectations low.

He set guidance low, and he beat already in the first quarter.

And the big problem that everyone was worried about with PayPal was margin contraction.

We saw an expansion of margins in that first quarter by 98 base points.

That was a good deal.

Yes, all right.

So let's talk about what we've seen happen in the stock here.

We re rating.

Perhaps this is this is a big deal, because the stock trades down to 15 times earnings relative to the General S and P at 21 times.

So why its historic multiple is about 30 times as margins contracted and growth slowed, the multiple contracted.

Now what you're seeing is a re acceleration.

Since Andrew Chris came on board margin expansion, you saw a total payment up 14% last quarter revenues up 9% earnings up 18% total transactions, up 11%.

So as we get more consistency, a few quarters under his belt, where the market can believe that mar margins have stopped going down and revenues continue to grow.

Earnings continue to grow.

Cash flow continues to grow.

We could see a multiple expansion on top of the business expansion, so maybe back up to 18 times 20 times 22 times.

I don't know if we're going back to historic multiples because that the halcyon days of the 30% growth may be behind us.

But a normalised multiple would really do a lot to raise the stock price from here.

And then there's one more financial metric you're looking at, and that is free cash flow.

Yes, this is my favourite metric.

This is the one that can't be manipulated.

They generate about $5 billion a year of free cash flow.

It's amazing that I'm talking about a turnaround situation that generates $5 billion of free cash flow, has got $9 billion of cash on their balance sheet.

So all the runway in the world and further to getting the stock price up, they're actually using that free cash flow to buy in stock.

They're buying about $5 billion a year at a $67 billion cap they could buy in the entire company in 12 or 13 years.

So we we like that situation.

We like that.

It's cash generative, and that gives them all the runway they need, in addition to the $9 billion on their balance sheet of cash.

Interesting.

All right, We always like to talk about what could go wrong in a scenario like this, and that's, you know, there's a lot of competition in this space.

Yes, there's no question.

Obviously, Apple pay is a big threat.

Everyone's worried about that.

The regulators are cracking down a little bit on Apple, not being able to control everything.

The other thing is the historic legacy.

Fear of Braintree.

They actually have 10% of global enterprise spend.

They process about $500 billion of $5 trillion.

So when you think about PayPal through Braintree, so when you think about people's like, Oh, I don't use PayPal anymore.

Oh, have you used uber today?

Have you used Ticketmaster?

How do you use booking?

You bet.

And that's where they're starting to get a bottoming, a trough of margins and they're starting to re accelerate because they're bringing data.

They're bringing a I.

They're bringing faster checkout, higher conversion at checkout.

So now they can start to charge a little bit more interesting.

OK, and you own PayPal.

We own PayPal.

It's a big position, personally.

And for clients.

OK, let's get to the You don't like.

This is very much traditional finance company talking about Goldman Sachs.

The stocks actually rally back pretty nicely over the past year, so let's get to why you don't like it.

You think it's still too dependent on trading profits.

But isn't that like part of the reason you buy Goldman Sachs?

Yeah, well, let let Let me let me clarify We like Goldman Sachs.

We don't like Goldman Sachs at today's prices.

OK, so we wouldn't put new new money to work at Go in Goldman Sachs.

It's doubled since the October lows.

It's run ahead of a lot of its, uh, opportunity.

You know a third to a half of their business, though in any given quarter is trading profits.

So to eat what they kill.

If you if you have low volatility or you have a miss in trading profits, it it's too lumpy in terms of the long term, and they're getting a premium right now.

They're trading above their average multiple.

They're trading about 14.4 times tangible book peak cycle.

Maybe they can go up to two times tangible book.

But you know, one time it's a bargain.

They're kind of in that, uh, middle of the range space.

So am I excited to put new money to work after they've just doubled in a in a few few months?

Uh, the answer is no.

On a pullback, Would we get interested?

Potentially.

But it would have to be a very nice pullback.

OK?

And we can also say and and this is your point number two, the thing that they tried to do to become less dependent on trading profits didn't work out so well.

Complete train wreck.

So, uh, you know, the message is blurry.

Uh, they tried to do Marcus for many years.

They tried to do apple card credit card.

They tried to get into the credit card business.

That's not their bread and butter.

What they need, perhaps to David Solomon CEO David Solomon's credit.

He said he sort of cut their losses in that he said.

It wasn't it didn't work.

We're done.

Leaders always come to the correct conclusions after, after trying everything else.

But leaving that aside, I think the message is getting clearer.

And they do want to spend more time building out the reoccurring revenue businesses like the Asset Management, which is a relatively small portion of their overall business, to 0.1 every quarter.

They got to start from square one, all right, and let's get to the third thing here that we need a rate cut.

This is a key.

They've got a peerless investment banking franchise, M and a debt refinancing IPOs.

It's just been a little bit anaemic with such an aggressive rate hiking cycle over the last year and a half, 2021 was an amazing 2223 anaemic.

It's starting to come back in fits and starts, but we're really gonna need to see a cut or two cuts for animal spirits to really kick in the M and a game to get on boards, to say I gotta buy that company before someone else does.

It's time to refinance all of our debt.

It's time to do equity offerings and then for companies that want to go public, now is the time animal spirits are back.

We're not quite there yet.

I think a cut towards the back half of the year and that may take a quarter, quarter and a half.

And that's why we're probably a pass on goal for new money at these levels.

But on a pullback, we would consider it to have to be meaningful.

Pullback got you.

OK, so pull back.

We talk about you know, what could be the upside case here?

The other one would be, as you mentioned, if there are rate cuts, Yes, and they could come sooner than we expect.

We saw the jobless claims yesterday were higher than expected and Chairman Powell was very explicit about that.

Yes, we're watching the inflation numbers.

He's kind of in the camp that we all are waiting for those owner rents to come down.

They've just been stubborn.

We all look at Zillow rents and everything else.

But he did make an explicit note about the labour market because that's the second part of the mandate.

And we're seeing some signs that maybe that softening a little bit, which could give them cover to at least do one cut.

You know, the earlier they go, the less they're gonna have to do.

If they were to go over the summer, which is lower probability, maybe they only have to do one or two.

If they wait longer until maybe after the election, it might require more cuts.

I love to you snuck in some macro stuff for us, which we love.

Thanks so much.

All right, so let's sum up what you're telling investors here, basically, you say, by PayPal on performance under new leadership, the play on value add marginal acceleration, healthy generation of free cash on the other side, you said.

For now, avoid Goldman Sachs, a little pricey and so dependent on trading profits.

It's playing catch up on asset management, and it is waiting for those rate cuts to ignite capital markets.

Thanks.

I have a great weekend, and thank you so much for watching goodbye or goodbye.

Be sure to tune back in next week for all new episodes at 3:30 p.m. Eastern