Goldman Sachs vs. The Charles Schwab Corp.: Which Capital Market Stock is a Better Buy?

The Goldman Sachs Group, Inc. (GS) is an established financial institution that provides a range of financial services to corporations, financial institutions, governments, and individuals worldwide. It operates through four segments—Investment Banking, Global Markets, Asset Management, and Consumer & Wealth Management. The Charles Schwab Corporation (SCHW) provides wealth management, securities brokerage, banking, asset management, custody, and financial advisory services. The company operates in two segments—Investor Services and Advisor Services.

With major stock market indexes hovering near all-time highs over the past few months, and the Fed holding benchmark interest rates unchanged for now, capital market activities, such as IPOs, are rising. According to Globe Newswire, the global financial services market is expected to grow at a 9.9% CAGR to hit $22.5 trillion this year. Consequently, both GS and SCHW should benefit.

GS’ stock price has advanced 12.4% over the past three months, while SCHW has returned 4.4%. Also, GS’ 28.2% gain over the past six months is significantly higher than SCHW’s 19.6% returns. Furthermore, in terms of year-to-date performance, GS is the clear winner with 41% gains versus SCHW’s 33% returns.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On April 13, GS announced that it intends to expand its footprint in the U.K. by opening a new office in Birmingham. Richard Gnodde, the company’s CEO said, “Establishing a new office in Birmingham will diversify our U.K. footprint and give us access to a broad and deep talent pool in the local area. We see tremendous opportunity to enhance our U.K. presence and continue delivering for our global clients.”

On June 23, SCHW announced that its new digital onboarding capabilities will be available to independent advisor clients beginning next month. Andrew Salesky, a SCHW managing director, said “This is a major milestone in our efforts to provide the fastest, most secure way for advisors to onboard new and existing clients.”

Recent Financial Results

GS’ net revenue increased 102% year-over-year to $17.70 billion for its fiscal first quarter, ended March 31, 2021. The company’s pre-tax earnings grew 518% year-over-year to $8.30 billion, while its EPS came in at $18.60, up 498% year-over-year.

SCHW’s net revenue increased 80% year-over-year to $4.71 billion for the first quarter ended March 31, 2021. Its adjusted net income grew 104% year-over-year to $1.69 billion. Also, its adjusted EPS came in at $0.84, up 38% year-over-year.

Past and Expected Financial Performance

GS’ net income and EPS grew at CAGRs of 45.8% and 56.1%, respectively, over the past three years. Analysts expect GS’ revenue to increase 24.9% for the quarter ended June 30, 2021, and 14% in its fiscal year 2021. The company’s EPS is expected to grow 1,777.4% for the quarter ended June 30, 2021, and 84.3% in its fiscal year 2021. Also,  its EPS is expected to grow at a 20.4% rate  per annum over the next five years.

In comparison,  SCHW’s net income and EPS grew at a CAGRs of 15.7% and 9.4%, respectively, over the past three years. The company’s revenue is expected to increase 81.9% for the quarter ended June 30, 2021, and 54.8% in its fiscal year 2021. Its EPS is expected to grow 38.9% for the quarter ended June 30, 2021, and 29% in  2021. SCHW’s EPS is expected to grow at a 17.7% rate per annum over the next five years.

Profitability

GS’ trailing-12-month revenue is 3.73 times SCHW’s. GS is also more profitable, with a 29.33% net income margin compared to SCHW’s 28.92%.

Furthermore, GS’ 15.64% and 1.26% respective ROE and ROA  compare favorably with SCHW’s 9.74% and 0.85%.

Valuation

In terms of forward non-GAAP PEG, SCHW is currently trading at 0.93x, which is 66.1% higher than GS’ 0.56x. Moreover, SCHW’s 22.04x forward non-GAAP P/E ratio is 167.8% higher than GS’ 8.23x.

So, GS is the more affordable stock.

POWR Ratings

GS has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. SCHW, in comparison, has an overall D rating, which translates to Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

GS has a B grade  Sentiment, in sync with analysts’ estimate that the stock will hit $407.30 in the near-term, which indicates a potential 9.6% upside. SCHW has a C grade  Sentiment, which is justified given that analysts expect it to hit $45.96 in the near-term, which indicates a potential 34.9% decline.

GS has a B grade  for Growth, consistent with analysts’ expectations that its revenue and EPS will increase significantly in the coming months. SCHW, in comparison,  has a Growth grade of C, which is consistent with analysts’ expectations that its revenue and EPS will increase but at a modest rate.

Of the 24 stocks in the B-rated Investment Brokerage industry, GS is ranked #8 while SCHW is ranked #24.

Beyond what we’ve stated above, we have also rated both the stocks for Stability, Value, Momentum, and Quality. Click here to view all the GS ratings. Get all the SCHW ratings here.

The Winner

With rising capital market activities, we think both GS and SCHW should benefit, but it is better to avoid SCHW because of its sky-high valuations. Rather, it is wise to bet on GS because of its relatively lower valuation, impressive profitability and massive growth prospects.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Investment Brokerage industry here. 

GS shares were trading at $380.36 per share on Monday afternoon, up $8.60 (+2.31%). Year-to-date, GS has gained 45.29%, versus a 17.62% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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