Tech stocks to hedge against a slowdown.
U.S. GDP growth is expected to slow from 3 percent in 2018 to 2.4 percent in 2019, and tech stock investors are feeling a bit squeezed. A maturing U.S. economic cycle and an ongoing trade war with China derailed some of the hottest tech stocks of the past decade in 2018, and tech investors are rightfully concerned about the slowdown. However, Goldman Sachs analyst Heath Terry says the long-term outlook for tech stocks exposed to high-growth markets remains bullish. Here are nine of Goldman’s best tech stock ideas.
Facebook (ticker: FB)
The FANG stocks cooled off in the second half of 2018, but Terry says the bull case for FANG is simply too good to ignore. Despite concerns over slowing user growth and potential data protection regulations, Goldman is projecting Facebook will average more than 20 percent compound annual revenue growth over the next three years. At the same time, the enterprise multiple for FB stock is currently well below both its three-year and five-year average, suggesting opportunistic investors are getting their best value in years. Goldman has a “buy” rating and $190 price target for FB stock.
Amazon has been a market leader for years, and the company’s long-term growth trajectory is as bullish as ever. Goldman is projecting compound annual revenue growth (CAGR) of 21 percent over the next three years, and Terry says AWS cloud revenue will grow at around 40 percent annually over that stretch. He estimates global e-commerce sales growth of 19.7 percent in 2019, 18 percent in 2020 and 15 percent in 2021. Goldman has a “buy” rating and $2,000 price target for AMZN stock.
Terry says the sell-off in Netflix stock in the past six months is a buying opportunity, and the stock represents the best risk-reward skew for long-term investors in the entire internet group. Terry says Netflix’s aggressive investment in original content will pay off for investors in the form of consistent domestic and international subscriber growth numbers well above consensus expectations in the next few years. Goldman projects 24 percent average revenue growth through 2021. Goldman has a “buy” rating and $400 price target for NFLX stock.
Not only is Alphabet the last of the four FANG stocks to make the list of top Goldman tech stock picks, it is also Terry’s overall top internet stock pick. Goldman is projecting three-year annual revenue growth of 20 percent, and Terry also says Google is consistently one of the most innovative companies in the market. Google’s massive size gives it a tremendous scale advantage over its competitors, and Terry says an economic slowdown would likely hurt the competition more than Google. Goldman has a “buy” rating and $1,300 price target for GOOGL stock.
Spotify Technology (SPOT)
Outside of the FANG stocks, Spotify is Goldman’s highest-ranked internet stock in terms of growth trajectory, margin expansion potential, innovation and competitive advantage. While the rest of the economy is slowing, Goldman says Spotify’s revenue growth will actually increase slightly from 29.6 percent in 2018 to 30.1 percent in 2019 as the company adds international subscribers and increases domestic penetration. Terry projects 27 percent annual revenue growth through 2021 and says Spotify trails only Google in terms of investment in product development. Goldman has a “buy” rating and $160 price target for SPOT stock.
Twitter is a controversial top stock pick given the social media company’s inconsistencies in user and profit growth. However, Twitter beats out even Facebook in spending on product development as a percentage of gross profit. Terry says Twitter and Spotify offer investors the most potential upside from current levels if they can produce consistent growth over time. Terry says the information quality improvement initiatives that cost Twitter precious users in 2018 will greatly improve the value of the platform in the long term. Goldman has a “buy” rating and $36 price target for TWTR stock.
Goldman is expecting 36 percent average revenue growth from Grubhub over the next three years, second only to Snap (SNAP) in the firm’s internet coverage group. The food delivery leader has been expanding its presence and aggressively adding partnerships. Grubhub now has deals with 26 of the 100 largest restaurant chains in the U.S. that account for a total of more than 69,000 stores. Terry says Grubhub has a significant scale advantage over its closest competitors as well. Goldman has a “buy” rating and $105 price target for GRUB stock.
Expedia Group (EXPE)
Despite having a cautious overall take on the online travel space, Terry says Expedia has an opportunity to take advantage of cutbacks in competitor marketing budgets. With a three-year CAGR projection of only 13 percent, Expedia may not be the best growth stock in the group. Goldman projects only modest online travel supply growth, but Terry says an uptick in business travel and a shift in discretionary consumer spending from goods to travel will help support demand growth. Goldman has a “buy” rating and $140 price target for EXPE stock.
Goldman projects 29 percent CAGR for Etsy over the next three years, and Terry says 2019 consensus earnings and revenue estimates are 4 to 6 percent too low. Terry says Etsy’s numbers are getting a boost from the company’s decision to increase its commission rate on transactions from 3.5 percent to 5 percent, especially since the company committed to reinvesting 80 percent of that incremental revenue. Terry says the combination of potential earnings upside, margin expansion and share buybacks more than justify Etsy’s premium valuation. Goldman has a “buy” rating and $54 price target for ETSY stock.
Goldman’s top tech stocks for a slowing economy.
To recap, here are nine tech stocks that Goldman recommends when the economy begins to slow:
— Facebook (FB)
— Amazon.com (AMZN)
— Netflix (NFLX)
— Spotify Technology (SPOT)
— Twitter (TWTR)
— Grubhub (GRUB)
— Expedia Group (EXPE)
— Etsy (ETSY)
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