Tech Stocks Face Earnings Bubble, Not Valuation One: Goldman Sachs
Investors are questioning whether technology companies' strong earnings growth can be sustained, according to Goldman Sachs. The investment bank's Global Investment Research team found that while tech valuations have moderated, particularly on a price-to-earnings (P/E) basis, implied future growth has been rising.
In its Global Strategy Views report, Goldman Sachs noted that the sector's 10-year compound annual growth rate of earnings has accelerated beyond the peaks seen around 2000. However, forward implied growth remains well below levels seen at the peak of the dot-com era.
The shift in investor sentiment comes amid a dramatic increase in capital expenditure by leading technology companies. Goldman Sachs said that for about a decade after the global financial crisis, major tech firms benefited from rising demand for software and cloud computing while remaining relatively capital-light.
However, the introduction of ChatGPT was followed by an 'explosion in capex' among hyperscalers. The increased spending has eroded their premium cash flows and pushed them towards debt and equity markets for funding, according to the report.