Goldman says buy these tech stocks to beat the turbulence — and gives one 80% upside

Published Mon, Apr 18 20227:19 PM EDT

Goldman Sachs names the tech stocks best placed to ride out the turbulence. All are on the bank's conviction list — its top buy-rated picks — and have "enticing" entry points. The tech sector has borne the brunt of a sharp spike in market volatility amid a slew of troubling macro events. The tech-heavy Nasdaq Composite is down more than 14% this year, and tech stocks were among the first quarter's worst performers. But Goldman Sachs sees software names as a "more defensive" play within the broader sector, as software companies continue to grow revenue and maintain profit margins amid a wave of digital transformation. "We believe software business models are far more insulated from severe economic shocks than past downturns given the reliance on recurring revenue and built-in expense agility that can support operating leverage," Goldman's analysts, led by Kash Rangan, said on Apr. 14. "Furthermore, history informs us that Wall Street often underestimates the growth duration and/or long-term profit potential of secular growth leaders in software," he added. Most of Goldman's buy-rated software companies have "sufficient upside" to buffer against higher interest rates, the bank said, adding that many appear to be trading at a sizable discount to their intrinsic value. "We want to highlight the following companies as having a strong long-term value proposition and enticing entry point. We have high conviction in these names in both the near- and long-term as they have strong business models, product moats and earnings potential," Rangan said. Microsoft One of Goldman's top picks in the software space is Microsoft , which the bank described as "one of the most resilient earnings stories" in tech and beyond. The company's cloud business could also see Microsoft's earnings per share double into 2027, the bank said. Goldman noted that Microsoft is also an efficient capital allocator with a successful track record of acquisitions, dividends and share purchases, making for a "compelling total return story." The bank has a price target of $365 on the stock, which closed at around $280 on Apr. 14, representing a potential upside of 30%. Salesforce Goldman also likes Salesforce . The bank said the company is known for improving its EPS in previous weak economic cycles and is well-leveraged to do so again. The company should also see higher margins and sustained revenue growth, the bank added. Goldman noted the company's strong leadership in its core — office productivity and operating systems — and said it is poised to be the second-largest global software company after Microsoft by 2025. Read more Fund manager names 3 'must own' tech stocks — and explains why he is keeping an eye on Meta Buy these 'safe haven' global tech stocks as risk-appetite returns, Morgan Stanley says ‘Forget FAANG’ and focus on value stocks in the current inflationary environment, Jim Cramer says "We believe Salesforce will increasingly gain scale and grow its operating margins amidst a potential doubling in size, all while being able to accommodate acquisitions with very little dilution to its operating margins," Rangan said. The bank's price target of $340 on the stock implies a potential upside of 80% to its closing price of around $189 on Apr. 14. Datadog Security software firm Datadog also makes Goldman's list. The bank believes the company is "uniquely positioned" to benefit from the long-term shift to the cloud, and enjoys a "rare combination" of a strong set of products and attractive customer acquisition costs. The company's expanding products should allow it to grow its market share, while its efficient allocation of capital also bodes well for margins and cash flow without hitting growth, Rangan said. Goldman has ascribed a price target of $223 on the stock, which closed at around $136 on Apr. 14 — an implied potential upside of 63%. ServiceNow California-based ServiceNow is another Goldman favorite. The cloud computing company has the potential to be a "relatively defensible business" in the event of an economic slowdown, Rangan said. Its operating margin can scale well in the long term and potentially approach best-in-class margins of around 40-45% — comparable to that of Adobe and Microsoft — in the long-term, he added. Goldman has a price target of $752 on the stock, representing a 48.3% upside to its closing price of $507 on Apr. 14.

The once high flying tech sector has endured a heavy selloff this year amid concerns that the sector's growth could be curtailed by rising interest rates. The tech-heavy Nasdaq Composite is down more than 14%.

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Goldman Sachs names the tech stocks best placed to ride out the turbulence. All are on the bank's conviction list — its top buy-rated picks — and have "enticing" entry points.