Goldman Sachs Traders Doubtful on 'Mag 7' But Bullish on AI Narrative
Since the beginning of this year, U.S. technology stocks have fluctuated upwards, with the Nasdaq 100 Index alternating between gains and losses for seven consecutive trading days, showing signs of stabilization.
This week, technology stocks will also face numerous catalysts: the U.S. September CPI, Tesla's robotaxi day, AMD's Advancing AI conference, etc. What will the subsequent trend be? Peter Callahan, a top technology strategist at Goldman Sachs, recently released a research report answering ten questions that investors are focusing on.
Q1: What causes Microsoft's stock price to be low?
Microsoft's cumulative increase this year is slightly over 10%, ranking second to last among the Mag 7; in the past 11 trading days, Microsoft's stock price has closed lower on 9 trading days.
Callahan believes that the "best" explanation for Microsoft's sluggish performance is that the company's earnings per share have not been upwardly revised in the past few quarters. This is mainly due to:
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1) Investors are concerned about the stagnation of Azure cloud business growth;
2) The company has lowered its guidance for the revenue growth rate of its intelligent cloud business in fiscal 2025;
3) Investors are re-evaluating the application prospects of copilot.Q2: Do investors prefer vertical growth stocks?
As growth stocks struggle to maintain a consistent bid, and the broader horizontal growth stock trend weakens, investors currently seem to favor industry-leading vertical growth stocks.
Generally speaking, horizontal growth stocks refer to companies that operate in a wider range of fields, while vertical growth stocks are companies that delve deeply into a specific vertical field.
Research reports suggest that the performance divergence of growth stock assets has always been a focus for investors. In fact, the current EV/FCF premium of vertical growth stocks is about 10 times that of horizontal growth stocks, mainly due to the market's emphasis on their proprietary data moat and the uniqueness of their fields.
Q3: Why has Salesforce's stock performance exceeded Workday's?
In the past month or so, Salesforce's cumulative increase has been more than 20% higher than Workday's.
Goldman Sachs points out that, in addition to the "positioning" factor, the price difference between the two is driven more by "narrative" rather than fundamentals.
The report states that Salesforce is increasingly shifting towards an "agent" product cycle, which is expected to achieve significant growth in fiscal year 2025 and beyond. Analysis shows that Workday's forward price-to-earnings ratio is only three times that of Salesforce, indicating that the market has a strong positive sentiment towards the latter.Q4: Will there be changes in Mag 7 as we enter 2025?
The research report indicates that although the profit outlook for Mag 7 remains stable, full confidence cannot be established for a few of the companies included.
The main concerns are: Microsoft (lacking earnings per share revision drivers), Apple (valuations will be more reasonable a year later relative to iPhone 17 catalysts), Nvidia (investor worries about the stock price peaking), and Google (regulatory concerns and potential risks driven by AI).
Q5: How long will the market's "low volatility" or "defensive" rotation last?
Callahan believes that although the market is filled with uncertainties, the key lies in whether investors believe the market will shift towards a cyclical market.
The report states that considering the overall positive trend in the data, there needs to be heightened vigilance towards various squeeze factors from now until the election period, but things may return to normal afterward. However, Callahan also adds that everything still depends on the economic data.
Q6: What is the view on the rise of A-shares and Chinese internet stocks?
The report says that currently, many investors are still inclined to remain on the sidelines and it has not yet affected the inflow of funds into large-cap technology stocks in the U.S. market.However, relevant data indicates that the current rise in A-shares has pushed the forward price-to-earnings ratio of the MSCI China Index to 11.3 times. With continued policy support, the valuation could potentially expand to 12 times, implying that the total return still has a 15-18% upward potential.
Q7: Will Nvidia and AI themes continue to be hot?
Since the summer, changes in investor sentiment and positioning related to semiconductors and AI themes have been widely discussed.
Goldman Sachs believes that semiconductor/AI companies deserve close market attention from now until the end of 2024 to 2025. Considering the current clearer investor positioning and a more favorable market backdrop (global central banks entering an easing cycle, widespread recovery in data centers, and continuous strong investment in AI, etc.), the current market environment for these companies may be as favorable as it was in June 2024, or even better.
Q8: Why has Live Nation Entertainment performed exceptionally well?
Research reports point out that recently, the performance of industry-leading companies has often been very good, such as Duolingo, Netflix, etc.
In addition, the optimism towards Live Nation is also partly attributed to the uniqueness of its products, such as the scarcity of artist tours, which may lead to higher consumer demand for their products.Q9: What is the perspective on the growth potential of top internet companies like Netflix, Meta, and Duolingo?
Goldman Sachs believes that the market is rewarding the scarcity of "clean growth" (referring to sustainable and environmentally friendly growth) and is shifting to assess companies from the framework of the fiscal year 2026.
From this perspective, it is difficult to find investors with too many negative views on these top internet companies. However, considering that the market environment will become more complex starting in the fourth quarter (including geopolitical risks, Christmas holidays, the US election, etc.), discussions around these companies will begin to diverge.
Callahan believes that if the timing of the company's financial report release is close to the election time, it may limit the momentum of the stock price increase after the financial report is released.
Q10: How do cyclical stocks trade around earnings?
Callahan believes that, given the "buy on rate cuts" trade and the aforementioned continuous improvement in the macro background, it may be more difficult to be bearish on cyclical stocks.
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