While the sharp and swift sell-off in tech-stocks has wiped out trillions of dollars in market value since the start of the year, Goldman Sachs believes the “cyclical carnage” has helped to create exceptional long-term opportunity for the sector.
The magnitude of the draw down witnessed in tech – with the NASDAQ -30% off its highs - already outpaces a lot of past experiences.
But what’s more fascinating to Peter Callahan Goldman Sachs’ U.S. TMT sector specialist is time currently being spent with clients looking at the growthier pockets of tech.
Callahan equates the current preoccupation with the growthier pockets of tech to NASDAQ composite correction last witnessed in 2000. He cites the growth software basket, currently down -68% off the highs after retracing almost three quarters of the highs that peaked in the middle of 2021.
“There were certainly micro fundamental drivers that were intact over the last 18 months which builds on top of a lot of the Cloud and secular drivers we've been talking about for years,” notes Callahan.
“And that helped drive the fundamentals higher for these businesses.”
While growthier pockets of tech were trading at 15, 16, 17 times forward revenue, Goldman Sachs believes we’re now back to pre-covid levels [six, seven, eight times revenue].
Instead of looking at tech overall, Goldman Sachs’ focuses on pockets of the market where the broad consensus is underestimating the impact of earnings growth or some sort of structural change in the business.
Despite the undeniably slower macro environment, the broker notes a lot of these businesses continue to perform well and believes there are great opportunities out there in different companies.
The broker believes some of the movements in tech architectures, that the pandemic accelerated have real legs underneath them and are likely to continue to drive growth for the coming three to five years.
There were nearly 200 software companies in the public market today over a billion-dollar valuation… that number was 50 ten years ago,” notes Callahan.
“For investors out there, that's both opportunity and challenge to find the right one.”
Callaghan attributes the trouble investors have experienced with stock selection to the difficulty navigating some of the big changes within macro backdrop.
While the market is giving up opportunities for people that can stomach the near-term volatility over the coming months, Brooke Dane a portfolio manager at Goldman Sachs says it all comes down to identifying the right businesses.
“you're getting an opportunity right now to buy some assets at prices that we haven't seen for five, six, seven years in terms of the multiples of forward revenues or cash flows,” notes Dane.
The three areas of the market right now Goldman Sachs is spending a lot of time assessing include: software broadly, cyber security, and semiconductors.
The broker thinks there are real opportunities in each pocket of that market.
What’s underappreciated by the market, adds the broker is that the move to the cloud is kicking off a whole new cycle of security architectures.
“Finding the right companies that are going to benefit from that, again, is going to create really compelling returns… for our clients out there,” the broker notes.
“So, cyber security is an area we're spending a lot of time on.”
When it comes to the semiconductor industry, Dane believes the current discount to the market multiple is looking severe.
However, given that some semiconductor companies are on the wrong side of some of these trends, the broker warns investors to be highly specific about the names they buy into.
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