Goldman’s David Kostin says tech disconnect is ‘biggest mispricing’ in U.S. stocks

Goldman Sachs chief U.S. equity strategist David Kostin speaks during an interview with CNBC on July 11, 2018 on the New York Stock Exchange.

Brendan McDermid | Reuters

LONDON β€” A major disconnect in the U.S. tech industry is reportedly top of mind for investors in 2022 Goldman Sachs Chief U.S. equity strategist David Kostin.

U.S. tech stocks sold off sharply in the first week of the year, Nasdaq 100 It briefly entered correction territory on Monday before rebounding to snap a four-day losing streak.At the same time, although S&P 500 It was the second worst opening week since the collapse of Lehman Brothers.

Investor jitters were largely driven by the prospect of a higher interest rate environment, with the Fed taking a more hawkish tone over the past month. Markets are now bracing for a potential rate hike and a tightening of the central bank’s balance sheet.

Therefore, analysts widely 2022 is expected to be a tough year of high growth Tech companies benefiting from the ultra-easy monetary policy necessary for the Covid-19 pandemic as stimulus is lifted.

β€œThe biggest mispricing in the U.S. stock market occurs between companies that expect high revenue growth but low or negative profit margins and high-growth companies that have positive or very significantly positive profit margins. This gap has adjusted substantially over the last year.” Kostin told CNBC on Monday ahead of the Wall Street giant’s global strategy conference.

Kostin highlighted that the high-growth, low-margin stock is trading at 16 times enterprise value-to-sales in February 2021. The enterprise value-to-sales ratio helps investors value a company when it takes into account sales, equity and debt.

The shares now trade at about 7 times EV/sales, Kostin said.

“Most of this happened in the last month or so, mainly because valuations or the value of future cash flows decline in a higher rate environment as interest rates rise,” Kostin said.

“It’s a big deal, so the gap between those two, I would say, is the biggest topic of conversation with customers. You’ve had a big downgrade of low-margin expected revenue-growing companies, and the argument might be , there is more work to be done in the adjustment.”

He believes the gap between the two stocks remains fairly close and could widen. This could manifest as higher valuations for companies with fast growth and high margins, or a further pullback for companies with low or negative margins, Kostin said.

“Broadly speaking, it comes down to the relationship between interest rates and equities, the speed and magnitude of change, and profit margins in particular is a key topic for fund managers, which is very important in the interest rate environment we’re going through right now,” Kostin said.