High-growth companies, or those with expected sales growth of over 30%, have seen their shares slide 58% this year on an enterprise value-to-sales basis, compared to a 23% contraction for the typical Russell 3000 stock, according to Goldman Sachs.
But even though shares of once-high-flying companies have taken a substantial beating already, Goldman Sachs strategists are warning that there still could be plenty more downside ahead.
“Growth stock valuations are no longer expensive, but not yet depressed,” wrote Ryan Hammond, the vice president of US equity strategy at Goldman Sachs, in a July 25 note.
Although high-growth stocks are trading at a median EV-to-sales multiple of 4x, which is down sharply from a peak of 14x in late 2021 and slightly below the median level since 1995, Hammond noted that the cohort traded at an EV-to-sales multiple of about 2x after the tech bubble and the financial crisis. That suggests that the group’s valuation could continue to fall.
Investors appear to be bracing for more pain for high-growth names, which are currently the only group trading below their long-term median absolute valuations, Hammond noted. Their 2.8x EV-to-forward sales multiple is about 10% below its long-term median of 3.1x, he wrote.
Besides high-growth names, lower-quality growth stocks that are unprofitable and have high cash-burn rates are the most at risk right now, Hammond wrote. Conversely, companies that are on a path to profitability and have fair valuations should hold up well, in the strategist’s view.
“We expect investors will reward higher quality growth stocks but continue to avoid unprofitable growth stocks that would be required to tap into financial markets at a time when the cost of capital is rising,” Hammond wrote.
While profitable companies can finance operations through their cash flow, firms in the red are forced to rely on external capital to keep their businesses running, Hammond wrote. And the strategist noted that unprofitable firms’ three options for doing so — issuing new shares at a steep discount, selling debt as high-yield credit markets slow, and looking for a merger as financial conditions tighten and the economy weakens — are all unattractive right now.
“The rising cost of capital, tightening financial conditions, and growing recession risk will limit the potential valuation upside for unprofitable growth stocks,” Hammond wrote.
18 growth stocks to buy
While unprofitable companies may have a tough road ahead, Goldman Sachs believes that the future is bright for growth names that trade at cheap, attractive valuations compared to their peers and are on pace to become profitable by the fourth quarter of 2022 or earlier.
Below are 18 stocks that fit that description and also have achieved sales growth of 20% or more since 2021 — and are on pace to do so through 2023, according to Goldman Sachs.
Along with each name is its ticker, market capitalization, sector, consensus estimate of 2023 sales growth, and EV-to-sales ratio. Note that stocks in the financials, real estate, and energy sectors weren’t considered in the analysis.