There might not be two companies that symbolize the term “blue-chip stocks” more than Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS). These two financial institutions have long, distinguished histories and are synonymous with Wall Street and investment banking.
In fact, they remain two of the largest investment banks in the country, and they both just released their third-quarter earnings this week. This has been a particularly difficult market for investment banks, so how are they faring? Let’s take a look at their third-quarter results to see which one is the better option.
Goldman Sachs narrows its focus
Goldman Sachs saw its revenue decline 1% year over year in the third quarter to $11.8 billion, while its net earnings fell 33% to $2.1 billion. The firm’s 18% year-over-year increase in operating expenses was a primary reason for the earnings decline. A $506 million write-down of intangibles related to the sale of its GreenSky consumer lending platform and impairments of $358 million related to real estate investments were the chief culprits.
In the quarter, the Global Banking and Markets business saw revenue increase 6% year over year to $8 billion, but Asset and Wealth Management was off 20% to $3.2 billion.
The sale of GreenSky in October marks an apparent shift by Goldman Sachs out of the consumer lending business. The firm had hoped to bolster this side of the business through GreenSky and other initiatives like Marcus online banking, credit cards via the Apple Card, and others to provide an additional revenue stream beyond investment banking and asset management. However, these efforts have been losing money.
On the third-quarter earnings call, Goldman Sachs CEO David Solomon said their strategy now is to narrow their focus.
“We’ve worked to narrow our focus,” Solomon said. “You’ve seen us execute around Marcus loans and GreenSky. Our partnerships with Apple and GM are long-term contracts, and we don’t have the unilateral right to exit those partnerships. So our focus at the moment is on managing them better, getting rid of the drag and bringing them to profitability.”
Morgan Stanley sees “monster” benefits from E*Trade integration
Morgan Stanley saw a 2.3% revenue increase in the third quarter, while its net income fell roughly 8% to $2.4 billion. Investment banking revenue fell 27% to $938 million, but the firm saw solid revenue increases in both its Wealth Management and Investment Management businesses.
The firmʻs market-leading wealth management business saw a 5% year-over-year increase in revenue, bringing it to $6.4 billion, while its investment management revenue climbed 14% to $1.3 billion.
Morgan Stanley also reached a major milestone by finally completing the integration of E*Trade, bringing some 14 million accounts and $900 billion in assets under management over to its platform. That years-long undertaking took a lot of time and expense to complete, but the real benefits are still to come.
“This will continue to enhance our ability to introduce clients and advisors and seamlessly transition them into advice-based relationships,” Chairman and CEO James Gorman said on the earnings call. “… We think over the next 10 years, that’s going to pay monster dividends.”
Which blue-chip stock is better?
These are two of the top three investment banking firms in the world, ranking at or near the top in deals, depending on which measure you use. This has been a brutal stretch for M&A, IPOs and underwriting in general, but that will turn, and when it does, both of these stocks will probably soar.
As Gorman said on the earnings call, the market should improve in 2024.
“We are seeing increasing evidence of M&A and underwriting calendars that are building, and while we expect momentum to continue this year, given the fourth quarter has some seasonal considerations, we expect most of the activity to materialize in 2024,” he explained.
However, if youʻre going to pick one over the other, Morgan Stanley is the better stock. It has had better long-term returns over the last 10 years, and that is because it has a more balanced revenue stream. Morgan Stanley is among the leaders in investment banking and wealth management, while Goldman Sachs is much more reliant on investment banking. As a result, Morgan Stanley has enjoyed smoother, steadier and better returns over time.
While stocks are pretty cheap right now and warrant a look, given the expected improvement in investment banking, the edge goes to Morgan Stanley over the long term.