Tech stocks are having a moment. Investors have shaken off regulatory concerns to propel tech stocks higher, with the tech-heavy Nasdaq index up a whopping 25% year-to-date. Chip stocks are also enjoying a relief rally after US-China trade tensions sparked heavy selling in 4Q18. And in its wake comes the S&P 500, now up 20% since the start of the year.
Goldman Sachs isn't immune to this increasingly bullish sentiment. The firm has just released a rash of tech upgrades. Mostly firms reiterate recommendations- so a rating change speaks volumes about how a firm perceives a stock’s outlook (or, indeed, a sector). So which four tech stocks is Goldman Sachs re-evaluating right now? Let’s take a closer look, and see whether the Street agrees with this newly positive outlook…
Snap Inc (SNAP)
Five-star Goldman Sachs analyst Heath Terry has just upgraded disappearing photo app Snap. New hyper-realistic augmented-reality filters could lead SNAP to positively surprise in the coming quarters says Terry.
His new buy rating comes with a $18 price target- which still only suggests 2% upside potential from current levels. That’s due to SNAP’s better-than-expected earnings results, which sent shares surging over 20%. Revenue growth accelerated (to 48% year-over-year), daily active user (DAU) growth turned sharply positive, Gross Margin expanded nicely, and EBITDA loss narrowed materially.
“Our checks with advertisers also lead us to believe that the company’s continued innovation in its ad-stack, particularly in self-serve, should allow Snap to substantially improve monetization of user time spent on the platform over time,” Terry stated.
Overall, the Street shows a cautiously optimistic Moderate Buy consensus on SNAP. Out of 22 analysts covering the stock, 9 rate SNAP a buy, 11 a hold and 2 say sell. Meanwhile the average analyst price target stands at $17- indicating 4% downside from current levels.
Stitch Fix Inc (SFIX)
Online personal shopping service Stitch Fix also gets the Terry thumbs up. The analyst upgraded the fashion stock on July 21 with a $38 price target. Even though shares have already climbed 60% year-to-date, Terry’s price target still indicates upside potential of 39%.
Terry wasn’t deterred by SFIX’s slowing active client growth, writing: “we believe product innovation, operational efficiencies, and geographic expansion, combined with the increase in retail store closures (particularly in apparel) represent significant opportunities for further outperformance.” He spies ‘compelling upside potential’ from Stitch’s expansion plans- including the recent UK launch and the new men’s, children’s, and plus-sized offerings.
Notably Goldman Sachs isn’t the only firm upgrading SFIX stock. Stifel Nicolaus’ Scott Devitt also notched his rating up to buy on July 22. With a $35 price target, Devitt explained: “We are confident in management’s ability to drive healthy ARPU growth in the intermediate term by continuing to improve keep rates through stronger personalization (Style Shuffle), high-quality client adds, and healthy retention.”
Although SFIX shows a Moderate Buy Street consensus, if we look at only the best-performing analysts this consensus shifts to Strong Buy. The top analyst average price target stands at $38.80.
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Applied Materials (AMAT)
Chip-making equipment stock Applied Materials has surged 59% year-to-date. Top Goldman Sachs analyst Toshiya Hari gave the stock a boost on July 22 with his ratings upgrade. He also raised the stock’s price target from $48 to $56 (7% upside potential). And most importantly- he added AMAT to the firm’s Conviction Buy List of top stock picks.
The move came thanks to Hari’s increasingly optimistic take on the chip sector as a whole. Hari now forecasts the WFE [wafer fab equipment] market to grow 7% year over year in 2020, up from the previous prior assumption of flat year over year.
“Not only have the memory producers reduced capex over the last 4 quarters, but they have also made adjustments to their factory utilization rates to combat the on-going challenging environment, and while the memory WFE market is likely to remain weak in 2H19, we now expect fundamentals to improve earlier than our prior expectations,” Hari told investors.
However the rebound may take some time to materialize. “While visibility is limited in the near term…we believe disciplined supply-side actions from the memory manufacturers…coupled with recent supply-side disruptions will drive…an improvement in memory supply/demand sooner than previously expected” the analyst concluded.
The Street currently has a Strong Buy consensus on AMAT with a $51 average price target (2% downside potential).
Analog Devices (ADI)
AMAT isn’t the only stock Hari is upgrading. He also issued a rare double upgrade for multinational semiconductor stock Analog Devices- taking ADI all the way from Sell to Buy. That’s with a $114 price target (9% downside potential).
“First and foremost, we acknowledge that our Sell thesis on the stock – which was predicated on our guarded view towards the analog semiconductor cycle and relatively stretched valuation – has not worked,” Hari admitted to investors.
“ADI, in our view, has exposure to multiple idiosyncratic revenue drivers,” the analyst continued. “Specifically, we believe ADI's disproportionate exposure to the Comms Infrastructure end-market coupled with content gain opportunities in Automotive will drive growth that exceeds peers in the analog semiconductor space.”
Out of 11 analysts covering the stock, 8 rate ADI a buy, and 3 rate the stock a hold. However the average analyst price target of $116 is 7% lower than the current share price of $125. Note that the stock is currently up 45% year-to-date.
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