TLDR
- Goldman Sachs says tech valuations have reset to their most attractive levels in decades, with PEG ratios now below the global market average
- Teradyne, Applied Materials, and AMD are the bank’s top chip stock picks heading into Q1 earnings
- KLA Corp, Onsemi, and Arm Holdings are flagged as likely underperformers this earnings season
- Goldman argues tech is not in a bubble, pointing to valuations well below 2000 dot-com peaks
- Rising oil prices and geopolitical risk may actually benefit tech stocks due to their low sensitivity to economic cycles
Goldman Sachs is making a contrarian call on the technology sector, saying the recent selloff has pushed valuations to levels not seen in over 20 years. At the same time, the bank is picking winners and losers ahead of Q1 chip earnings.
The bank’s chief global equity strategist Peter Oppenheimer says the tech sector’s price-to-earnings-to-growth ratio has fallen below the global market average. That kind of reset hasn’t happened since the recovery period following the dot-com bust of 2003 to 2005.
Tech stocks have been among the worst performers relative to the broader market over recent months. Capital has rotated into energy, industrials, and healthcare, leaving former market leaders well below their highs.
Goldman’s note points out that the global information technology sector now trades at a price-to-earnings multiple below consumer discretionary, consumer staples, and industrials. That’s a rare inversion of the normal valuation order.
Despite the weak price action, analysts have actually been raising forward earnings estimates for tech companies. Goldman calls this a “record gap between performance and underlying earnings growth.”
The bank says this is not a bubble. Current valuations remain below the peaks seen before the 2000 crash and the 1970s Nifty Fifty period. There has also been no flood of new tech IPOs, which Goldman sees as a sign of a healthier market.
Goldman’s Top Chip Stock Picks for Q1
On the chip side, Teradyne is Goldman’s highest-conviction buy. Analysts expect upside to earnings estimates and guidance, driven by tester demand across computing, optical, and memory segments. They also see potential for the company to gain share in GPU testing.
Applied Materials is also on the buy list. Goldman points to capacity pull-ins in DRAM and foundry as key drivers. The stock has roughly 60% exposure to etch and deposition, and the bank sees room for further valuation re-rating.
Advanced Micro Devices rounds out the bullish picks. Server CPU demand tied to AI infrastructure is expected to drive a modest earnings beat, even as PC weakness acts as a partial offset.
Stocks Goldman Warns Against
KLA Corp gets a cautious outlook despite a well-received investor day. Goldman says current equipment spending is skewed toward DRAM, where inspection intensity is lower, putting KLA at a disadvantage versus peers.
Onsemi faces headwinds from heavy automotive exposure, plus pressure in its image sensor and silicon carbide businesses.
Arm Holdings carries a sell rating. Goldman expects an in-line quarter, held back by smartphone-related headwinds.
On the macro side, Goldman flags that rising oil prices and Strait of Hormuz shipping risks may push investors toward tech. The bank argues tech cash flows are relatively insensitive to economic cycles and carry high sensitivity to falling bond yields.
Goldman’s latest data shows earnings revision breadth for tech is stronger than any other sector in the market right now.
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