David Kostin, Goldman Sachs’ chief executive officer for US equities strategist, speaks during an interview with CNBC on the floor of the New York Stock Exchange, July 11, 2018.
Brendan McDermid | Reuters
LONDON – A significant disconnect in the US technology sector is at the top of mind for investors in 2022, according to Goldman Sachs̵[ads1]7; US equities strategist David Kostin.
American technology sold out strongly in the first week of the year, taking the Nasdaq 100 into the correction area shortly on Monday before gathering to take a four-day losing streak.
Investor fragility has been largely driven by the prospect of a higher interest rate environment, with the Federal Reserve estimating a more hawkish tone over the past month. The markets are now preparing for potential interest rate increases, together with a tightening of the central bank’s balance sheet.
As a result, analysts generally expect 2022 to be a tough year for high-growth tech names who have benefited from the ultra-monetary policy needed by the Covid-19 pandemic as the stimulus winds down.
“The single biggest mispricing in the US stock 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 significant positive margins. That gap has adjusted dramatically over the past year,” he said. Kostin to CNBC on Monday ahead of the Wall Street giant’s Global Strategy conference.
Kostin emphasized that equities with high growth and low profit margins traded at 16 times the firm’s value-for-sale in February 2021. Corporate value-for-sale ratios help investors value a company, taking into account its sales, equity and debt. .
These shares are now traded at around seven times the company’s value in relation to sales, Kostin said.
“A lot of it happened in the last month or so, and in large part it’s because when prices go up, the valuation, or value of future cash flows, is worth something less in an environment of higher rates,” Kostin said.
“It’s a big problem, and so the gap between these two, I would say, is the biggest single topic of conversation with customers. You’ve had a huge reduction in the rapidly expected revenue growth companies that have low margins, and the argument is probably that more to go on in that transition. “
The gap between these two types of stocks remains fairly close, he argued, and is likely to widen. Kostin said that this may take the form of companies with both rapid growth and high profit margins increasing in value, or that those with low or negative margins withdraw further.
“It comes down to the relationship between prices and equities in general, the speed and extent of the change and also very specifically about the idea that profit margins are such a central issue for fund managers, and it is so important in interest rate changes. The environment we are experiencing right now, “said Kostin.