Generational Buying Opportunity for Tech Stocks Has Arrived, Says Top Goldman Analyst

Stock pickers have a generational opportunity to invest in technology companies, according to a leading analyst.

50-Year Valuation Fall

Peter Oppenheimer of Goldman Sachs (GS) said the tech sector was looking more attractive to investors because their valuations, relative to expected consensus growth, have fallen below that of the global aggregate market. Indeed, it is the worst comparison in 50 years.

Shares of tech companies hit record highs last October thanks to rapid revenue growth, booming profits and market leadership. Since then, they’ve fallen back on concerns about ballooning spending on artificial intelligence such as data centers.

Oppenheimer said investors are worried about how much return tech firms will get from these large financial commitments, and the potential disruptive impact of artificial intelligence on existing business models. A reliance on expanding computing power also means future growth is increasingly dependent on the physical world, he said.

Instead, old-economy stocks like utilities and manufacturing have become more popular as investors anticipate that the increased infrastructure spend needed to boost energy supplies and the data center construction will hike their share prices.

Tech is Being Overly Punished

While Oppenheimer said those sectors are deserving of higher values, tech is being overly punished despite strong growth rates. The valuation for hyperscalers, for example, is now close to the same as the rest of the S&P 500.

“Globally, the IT sector now has a P/E below consumer discretionary, consumer staples and industrials. Unlike most sectors, its valuation premium relative to history has also fallen sharply,” Oppenheimer said.

However, he said the return on equity for these stocks remains high, with earnings revisions more positive than for any other sector. The result is a record gap between performance and underlying earnings growth for tech.

“While a severe shock to credit availability or hyperscaler revenues could jeopardize this spending, analyst estimates for the magnitude of the earnings tailwind created by those investments have only increased during the past few weeks,” said Goldman. “These factors have opened up an opportunity in the technology sector where growth rates remain strong, but valuations are now low,” Oppenheimer said.

Iran War Resilience

Oppenheimer also said that the Iran war could also be beneficial for tech as the sector’s cash flows are less sensitive to any shock to global economic growth.

“Given the relative insensitivity of the cash flows in the technology sector to economic growth, and the benefit it would derive on any rally in bond yields, this sector might prove to be more defensive over the next few months,” said Oppenheimer and his team.

What are the Best Tech Stocks to Buy Now?

We have rounded up the best tech stocks to buy now using our TipRanks comparison tool. As can be seen below, ZoomInfo Technologies (GTM) has the highest upside of 56.40%.