KEY POINTS
- A technology stock derating likely has further to go, according to Goldman Sachs’ chief U.S. equity strategist, David Kostin.
- U.S. tech sold off sharply in the first week of the year, taking the Nasdaq 100 nearly into correction territory briefly on Monday before rallying to snap a four-day losing streak.
- Analysts broadly expect 2022 to be a tough year for high-growth tech names that have benefited from ultra-loose monetary policy necessitated by the Covid-19 pandemic as that stimulus unwinds.
Goldman’s Kostin: Tech disconnect ‘single greatest mispricing’ in U.S. stocks
A substantial disconnect in the U.S. technology sector is top of mind for investors in 2022, according to Goldman Sachs’ chief U.S. equity strategist, David Kostin.
U.S. tech sold off sharply in the first week of the year, taking the Nasdaq 100 nearly into correction territory briefly on Monday before rallying to snap a four-day losing streak.
Investor skittishness has been driven largely by the prospect of a higher interest rate environment, with the Federal Reserve striking a more hawkish tone over the past month. Markets are now preparing for potential rate hikes, along with a tightening of the central bank’s balance sheet.
As a result, analysts broadly expect 2022 to be a tough year for high-growth tech names that have benefited from ultra-loose monetary policy necessitated by the Covid-19 pandemic as that stimulus unwinds.
“The single greatest mispricing in the U.S. equity market is between companies that have high expected revenue growth but low or negative margins, and on the other hand high growth companies with positive or very significantly positive margins. That gap has adjusted dramatically in the last year,” Kostin told CNBC on Monday ahead of the Wall Street giant’s Global Strategy Conference.
Kostin highlighted that high-growth, low profit-margin stocks were trading at 16 times enterprise value-to-sales in February 2021. The enterprise value-to-sales ratio helps investors to value a company, taking into account its sales, equity and debt.
These stocks are now trading at around seven times enterprise value-to-sales, he said.
“Much of that took place in the last month or so, and largely that’s because as rates increase, the valuation, or the value of that future cash flows, are worth somewhat less in a higher rate environment,” Kostin said.
