Goldman Sachs names tech stocks with a ‘strong runway’ for growth — giving one upside of nearly 70%

One corner of tech, software, might be seeing “limited appetite” from the market, according to Goldman Sachs. But the investment bank is optimistic. It listed several reasons for its bullish call: “a more constructive setup due to near record-low valuations … conservative management guidance that better aligns with investor expectations, and an inflection towards cost optimization and margin expansion.” Goldman analysts forecast in a Jan. 23 note that the earnings per share (EPS) growth of software stocks may outpace the broader S & P 500 index this year. The S & P 500 was down nearly 20% for 2022, but has since pared some losses, rising around 6% year to date. The index’s EPS was at $217.39 as of Dec. 2022, but it could rise to $225.42 by end of this year, according to FactSet estimates. Goldman said it believes software’s free cash flow margins have room to grow, thanks in part to leaner organizations and greater sales capacity. The bank sees some stocks as compelling buys despite the risks of a downturn. It named Microsoft, ServiceNow and Workday, describing those stocks as “well-situated to present investors with near-term opportunity despite the evolving macro landscape.” “This group ranks well across a number of high-value characteristics such as mission criticality, strong retention metrics, quick time to value, operational efficiency, and/or investor-friendly capital allocation,” Goldman wrote. Goldman expects Microsoft and ServiceNow will be part of a broader trend in 2023: It foresees companies cutting costs in 2023, reversing their focus on growth. That, it said, bodes well for operating margins and earnings. Goldman also named a “set of offensive picks we expect to outperform peers when the broader environment inflects toward a recovery.” A trader who takes an “offensive” approach goes for outperforming, but riskier, stocks. The bank’s picks include Datadog , Snowflake and Salesforce . It gave Datadog a “buy” rating and a price target of $128, or an upside of nearly 70%. “We view these stocks to have a strong runway for long-term growth and may become more in-favor once we see signs of an economic recovery starting to take hold,” the bank’s analysts added. Software stocks were an investor favorite during the pandemic, but their popularity waned as economies reopened. Nevertheless, the tech sub-sector remains a key part of several long-term secular trends, such as cloud computing and artificial intelligence. Several Wall Street banks recently said they were optimistic on the sector in the long term , although they still cautioned investors to be selective, especially this year. — CNBC’s Michael Bloom and Zavier Ong contributed to this report.

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