Tech stocks could get hit by rising rates but Goldman says these names in the sector are safe

Published Mon, Nov 22 202111:26 AM EST

Technology stocks could get hit as rates rise, but Goldman Sachs said certain growth names could be safer bets. With the Federal Reserve set to begin pulling back its pandemic-era economic aid, bond yields have been on the rise. Tech stocks have come under pressure this year during periods of rising rates, which tend to negatively affect the sector. First, tech companies use lower rates to aggressively fund their growth and stock buybacks. Second, higher rates devalue the future cash flows that high growth companies promise out in the future. Goldman highlighted stocks that don't just trade on the value of earnings way out in the future. These companies have big cash flows today as well as on the horizon. "In a world of rising rates, portfolio managers need to differentiate between unprofitable growth stocks and those with elevated profitability," Goldman's David Kostin said in a Nov. 19 note. The firm advised investors to avoid companies valued entirely on long-term growth expectations. These hot companies are more vulnerable to the risk of higher interest rates or disappointing revenue, according to Goldman. "In contrast, growth stocks with elevated current profitability have comparatively shorter durations, and therefore are less exposed to the risk of rising interest rates," Kostin said. Goldman screened the Russell 3000 for companies with high revenue and high net margins projected in 2023. Take a look at six stocks on Goldman's list. Big Tech names Google-parent Alphabet and Facebook-parent Meta Platforms make the list. The companies have consensus 2023 profit margin expectations of 25% and 29%, respectively. In comparison, the median Russell 3000 stock with a market cap over $5 billion has a 2023 profit margin consensus estimate of 14%. Pandemic darling Zoom Video Communications also makes Goldman's screen. The company is expected to see sales grow 19% from 2021 to 2023. Zoom also is projected to post a 31% profit margin in 2023. Financial technology name PayPal snags a spot on the list. The digital payments platform has a consensus 2023 profit margin of 22%, while its sales are expected to grow 20% from 2021 to 2023. Other names to make Goldman Screen include semiconductor company Marvell Technology and data analytics software firm Palantir . —CNBC's Michael Bloom contributed to this report.

Zoom CEO Eric Yuan speaks before the Nasdaq opening bell ceremony in New York on April 18, 2019.

Kena Betancur | Getty Images

Technology stocks could get hit as rates rise, but Goldman Sachs said certain growth names could be safer bets.