Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Does Investment Banking make money at Lazard and Goldman Sachs?

Lazard Ltd (NYSE: LAZ) and Goldman Sachs (NYSE: GS) offer different answers to the question “does investment banking make money?”

In detail, both Lazard and Goldman Sachs are historic Wall Street investment banks that date to the mid-19th Century. They founded Lazard in 1848 and Goldman Sachs in 1869.

Moreover, author William D. Cohan wrote interesting and entertaining  histories of both Wall Street legends. Specifically, The Last Tycoons: The Secret History of Lazard Frères & Co, and Money and Power: How Goldman Sachs Came to Rule the World.

Importantly both Lazard and Goldman Sachs are public companies so we can see how much money they make. Thus, the stock market can show us how much money Wall Street could be making.

How Much Money is Wall Street Making?

Mr. Market, however, places very different valuations on Lazard and Goldman Sachs.

Lazard Ltd (NYSE: LAZ) shares were trading at $36.74 on the morning of 9 September 2019. In addition, Mr. Market gave Lazard a market cap of $3.8 billion on the same day.

Conversely, shares of The Goldman Sachs Group Inc. (NYSE: GS) were trading at $211.81 on the morning of 9 September 2019. Moreover, Goldman Sachs had a market capitalization of $74.962 billion on the same day.

Thus, some Wall Street institutions are making far more money than others. In particular, the centralized high-tech Goldman Sachs is thriving in today’s market.

Different Philosophies in Investment Banking

Essentially, Goldman Sachs and Lazard represent different philosophies in investment banking.

Lazard concentrates on financial advisory and asset management and emphasizes customer service. In contrast, Goldman Sachs emphasizes technology.

In fact, engineers make up 25% of Goldman’s workforce, CEO David M. Solomon said last year. Tellingly, Goldman Sachs employs engineering recruiters who have their own blog.

Goldman Sachs Engineers Lending

Therefore, Goldman Sachs increasingly views itself as an engineering company rather than a traditional investment bank. Current engineering projects at Goldman include cryptocurrency and Marcus an artificial intelligence (AI) that offers saving accounts and personal loans.

Strangely, Marcus is in one of the same businesses as its namesake Goldman Sachs founder: Marcus Goldman. To explain, Goldman made his fortune by making loans to small businesses in 19th Century Manhattan. Then reselling the loans or commercial paper to banks.

Similarly, the AI Marcus makes no-fee fixed rate personal loans, backed by Goldman Sachs to the general public. Hence,today’s Goldman Sachs is in the same business using different tools.

Which Investment Bank Makes More Money?

In comparison, Lazard emphasizes relationships rather than high-tech tools. Therefore, investors will ask which bank is making more money?

The answer is obviously Goldman Sachs, because Lazard reported gross profits and revenues of $621.88 million on 30 June 2019. Meanwhile, Goldman Sachs reported revenues of $14.351 billion and a gross profit of $13.129 billion on the same day.

Moreover, Stockrow estimates Goldman’s revenues were growing at a rate of 5.88%, while Lazard’s revenue growth shrank by -15.65% in the quarter ending on 30 June 2019. Plus, Lazard reported an operating income of $106.30 million and a net income of $65.78 million on 30 June 2019.

Meanwhile, Goldman Sachs reported a net income of $2.421 billion and an operating income of $3.127 billion at the end of June. Thus, Goldman’s bet on technology is paying off in a big way.

How Much Cash do Investment Banks Have?

Investment banks play with a lot of cash, but they are not for faint-hearted investors. For example, Goldman Sachs reports a negative operating cash flow of -$35.557 billion, a negative investing cash flow of -$1.502 billion, and a negative financing cash flow of -$2.386 billion on 30 June 2019.

However, Goldman Sachs reports a free cash flow of $8.618 billion for the last quarter. Comparatively, Lazard reported an operating cash flow of $82.56 million, a negative investing cash flow of -$17.28 million, a negative financing cash flow of -$87.27 million, and a free cash flow of $231.64 million.

Importantly, Lazard had $2.261 billion in cash and short-term investments on 30 June 2019. However, Lazard reported just $958.98 million in cash and equivalents on 30 June 2019.

Impressively, Goldman Sachs had $91.092 billion in cash and short term investments at the end of June. However, Goldman Sachs’ had $689.697 billion in cash on 31 March 2019.

Goldman Sachs has nearly $1 trillion in Assets

Finally, Goldman Sachs reported total assets of $944.903 billion, nearly $1 trillion on 30 June 2019. Lazard had assets of only $5.507 billion on the same day.

Therefore, Lazard is not playing in Goldman Sachs’ league. Consequently, I think Goldman Sachs is a good hedge against problems with the American economy because of all the cash.

In addition, I think Goldman Sachs looks poised for major growth. For instance, Goldman Sachs could build a blockchain that allows Marcus to offer loans to customers all over the loan.

How Goldman Sachs can Grow with the Blockchain

Notably, they design next generation blockchains like Ethereum 2.0 and Golem (GNT). Theoretically, Goldman could build a blockchain to deliver Marcus. To explain, a blockchain can deliver Marcus as a Decentralized Application (Dapp) or Smart Contract.

A Dapp or smart contract is a digital robot or AI that operates inside blockchain constructs like cryptocurrencies. Stablecoins, for example, are cryptocurrencies that contain a smart contract. A stablecoin smart contract makes payments from a bank account in fiat currencies.

Hence, Goldman Sachs could theoretically, build a Marcus stablecoin that makes payments in US dollars from an American bank account. In addition, Goldman can theoretically build a Marcus stablecoin that makes loans from a US dollar line of credit.

How Goldman Sachs could cash in on Project Libra

An obvious use for a Marcus stablecoin will be to reach customers in developing nations through encrypting messenger apps like Facebook’s (NASDAQ: FB) WhatsApp. Statista estimates that WhatsApp had 1.6 billion users worldwide in July 2019.

Interestingly, Facebook is proposing its own cryptocurrency scheme Project Libra. Moreover, many observers, including me, think Mark Zuckerberg is designing Libra as global banking infrastructure.

Thus Goldman Sachs could make money by using Marcus to offer loans and saving accounts through Libra. However, Goldman Sachs faces many challenges on the road to blockchain banking.

In particular, it will have to comply with the Know Your Customer (KYC) and Anti-money Laundering (AML) laws in dozens of countries. Thus, Marcus will have to know and enforce all those laws to offer services worldwide.

The challenge Marcus faces is vast, but so are the potential profits, the AI could generate. In particular, Marcus could make with a credit or debit card Goldman Sachs links to a stablecoin. 

In fact, the stablecoin could theoretically contain Marcus. Under those circumstances, Marcus could offer banking services to holders of a GS stablecoin.

Is Lazard a Value Investment?

Lazard is swimming against the financial industry current by valuing human relationships over tech. Therefore, many people will wonder if Lazard is a value investment because of its low price.

My response is that, Lazard is an interesting contrarian play because it is cheap and offers a good dividend. For example, Lazard shareholders received a 47₵ quarterly dividend on 2 August 2019. Moreover, that dividend grew by 3₵ in 2019 rising from 44₵ on St. Valentine’s Day 2019 to 47₵ in May.

Plus Lazard offered a 5.17% dividend yield, an annualized payout of $1.88, and a payout ratio of 41% on 9 September 2019, reveals. Moreover, Lazard offers eight years of dividend growth.

Thus, Lazard is an interesting contrarian play – that is not for the faint-hearted. Lazard’s collapsing revenue growth, in particular scares me. However, it is a nice dividend stock.

Is Goldman Sachs a Good Growth Stock?

I do not consider Goldman Sachs (NYSE: GS) a value investment because of its high share price. I; however, consider GS a good income and growth stock because of its dividend.

Impressively, Goldman Sachs paid a quarterly dividend of $1.25 on 29 August 2019. Additionally, the Goldman Sachs’ dividend grew by 40₵ in Summer 2019. To explain, GS paid an 85₵ dividend in May 2019 and a $1.25 dividend in August 2019.

Consequently, Goldman Sachs offered shareholder a dividend yield of 2.39%, an annualized payout of $5, and a payout ratio of 20.3% on 9 September 2019. In addition, credits GS with seven years of dividend growth.

Despite their risks, investment banks are still big moneymakers investors need to investigate. In the final analysis, Goldman Sachs could be poised for lots of growth, while Lazard is an interesting contrarian play.