Goldman Sachs Names Tech Stocks Expected to Become More Profitable
Goldman Sachs has named the tech stocks it expects to become more profitable over the next two years. The Wall Street bank said it has seen a shift in the mindset of company executives from prioritizing growth to profitability. According to Goldman’s analysts, this includes efforts to cut jobs and reorganize sales and marketing departments. Goldman Sachs believes that the bulk of the margin expansion is yet to come as companies start to realize the full benefits of cost-cutting measures implemented in the first half of 2023. The table below highlights Goldman’s five stocks with the biggest upside that are expected to benefit from the above factors.
Salesforce, a tech giant that provides customer relationship management services, is making significant changes to its operating model, which are expected to support the company’s profitable growth, according to Goldman. The investment bank expects the company’s profit margins to rise by 5.5 percentage points in 2023, reaching 28%. The bank also noted Salesforce’s commitment to shareholder returns, demonstrated by its $20 billion share repurchase program. “Making strides towards these efforts during a time of broader demand slowdown can set the company up to benefit from improved go-to-market efficiency at the same time business activity begins to recover,” said Goldman Sachs analysts led by Gabriela Borges in a note to clients on June 19. Goldman’s analysts give Salesforce’s stock a potential upside of over 50%.
Monday.com, a software company that aims to improve efficiency among teams, is also expected to improve its financial performance. The company recently increased its operating profitability by two years and is committed to generating free cash flow. “As gross churn remains stable and the macro pressure is concentrated in slower expansion rates, Monday.com is well positioned to increase its focus on expansion within its existing base (a more cost-efficient go-to-market) when the macro improves,” the Goldman analysts said.
Vertex, a tax software provider, is expected by Goldman Sachs to see a 4.2 percentage point expansion in its operating margins from 2022 to 2024. The investment bank believes that several changes the company has made to its operations will help margins in the near term and are yet to be fully reflected in consensus estimates. “We see this as one of the rare stories in software where there are significant, structural near-term margin tailwinds across operating expense items & gross margins that we believe are being missed in consensus,” wrote the analysts.
Guidewire, a platform for property and casualty insurers, could see a significant increase in its profit margins as its initial investments in cloud infrastructure start to bear fruit, according to Goldman Sachs. The investment bank has forecasted that Guidewire’s gross margins could rise from 49% in 2022 to 60% by 2025. “During the same time period, we expect total [annual recurring revenue] to grow from $664mn to over $1bn, as GWRE continues to have a strong competitive positioning and high win rates,” the analysts said, referring to Guidewire’s stock ticker GWRE.
Procore, a construction management software provider, has increased its focus on cost discipline and profitability over the past few quarters, according to Goldman. The bank’s analysts said the company’s strong presence in construction, along with its efforts to improve execution in international markets, is expected to drive revenue outperformance and margin expansion. “Accelerating the breakeven margin timeline … is likely to be a key catalyst for the stock given an otherwise resilient fundamental narrative as investors tend to reward companies demonstrating a healthy balance of strong top-line growth and improving margins,” the analysts added.
AsumeTech’s Michael Bloom contributed to this report.