The tech stock rally seen for most of the year has been taking a bit of a breather lately. However, considering the huge strides made by the big tech names in 2023, that hasn’t stopped market prognosticators from pondering whether we are entering an AI-fueled tech bubble.
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So, are we? Well, not according to Peter Oppenheimer, chief global equity strategist at Goldman Sachs. “Current valuations in the technology sector are not as stretched as in previous bubble periods and the ‘early winners’ that have enjoyed the strongest returns have unusually strong balance sheets and returns on investment,” Oppenheimer recently said. “We believe we are still in the relatively early stages of a new technology cycle that is likely to lead to further outperformance.”
With Oppenheimer making the case tech-driven innovation and growth are set to continue driving market sentiment, against this trend playing out, the analysts at Goldman have been pointing investors toward the names that can deliver on that front.
With this in mind, we used the TipRanks database to check out the info on two of their recent tech picks. Are other analysts on Wall Street displaying confidence in these equities too? It appears so; both have also been rated as Strong Buys by the analyst consensus. Let’s take a closer look.
Snowflake, Inc. (SNOW)
First up is Snowflake, a data cloud provider and a leader in data management and analytics. The company offers cloud-based data services on the public scene; user organizations can pool their resources and realize data management services on a nearly unlimited scale.
The potential here is huge. Snowflake boasts over 8,100 customers, a number that includes 639 client companies from the Forbes Global 2000 list, as well as 402 customers generating more than $1 million in product revenue over the trailing 12-month period. Snowflake’s data cloud sees over 3.3 billion daily queries, and the firm has a work backlog – the remaining performance obligations – totaling over $3.5 billion.
This provides a solid foundation for financial results, which is what investors really want to see. In the past several quarters, Snowflake has seen both its revenue and EPS totals trend upwards. The last reported quarter, Q2 of fiscal year 2024 (July quarter), showed a top line of $674 million, a figure that marked an impressive 35.5% year-over-year gain and beat the forecast by $11.7 million. At the bottom line, Snowflake’s EPS came in at 22 cents per share by non-GAAP measures. This was 12 cents above the expected value, and far better than the 1-cent loss reported in the prior-year period.
On the back of 3 quarters of downward revisions to Street expectations, following the latest quarterly readout, Goldman’s Kash Rangan sees several factors that are likely to boost the stock going into the next calendar year, including: “1) Scope for net expansion rate to trough/stabilize in 4Q as Snowflake benefits from firming consumption patterns and easier comps, setting the stage for positive inflection into FY25, 2) Durable expansion opportunity at G2K (good to know) customers (639, 32% penetration) that we see alleviating some of the temporary pressure on consumption growth in Snowflake’s largest accounts that manifested in 2Q/3Q, helping de-risk 2H expectations and 3) GA (general availability) of new products (Streamlit, Native App Framework, Snowpark Container Services, Unistore) into FY25 providing growth optionality that can help solidify re-acceleration prospects on top of a potentially improving budgetary/macro-environment, while also building confidence in Snowflake’s ability to hit $10bn in product revenue in F29.”
For Rangan, all of this adds up to a stock worth a Buy rating, and his price target, set at $210, points toward a 26% upside potential for the next 12 months. (To watch Rangan’s track record, click here)
Overall, Snowflake has picked up 30 recent analyst reviews and these include 25 Buys against 5 Holds, for a Strong Buy consensus rating. SNOW shares are currently trading for $166.38 and have a $195.80 average price target, a combination that suggests a one-year gain of ~18%. (See SNOW stock forecast)
Block, Inc. (SQ)
We’ll now take a look at Goldman’s second pick, Block, the digital financial services platform provider that was formerly known as Square. The company was founded in 2009, and offers its customers a range of products, mainly in the mobile payment space. These products include the original Square, which can turn any mobile device into an entrepreneur’s cash register and card reader; the Cash App, for sending, spending, and banking money; and the crypto platform Spiral.
Digital financial apps and resources are a rapidly growing niche in tech, and are widely seen as the future for financial transactions. Piggybacking on the ubiquity and flexibility of smartphones and other tablet devices, these products have over the past few years become the leading pathway for online commerce. When retail sector analysts talk about a cashless world, apps like these are one reason why.
Like Snowflake above, Block has seen a positive trend in its financial results over the past several quarters. In Block’s case, this recent revenue and earnings growth reverses a dip seen in 2021 and 2022 which came in response to huge pandemic-era growth.
The renewed gains can be seen in Block’s 2Q23 financial results. The company reported $5.53 billion in revenue for the quarter, a total that beat the estimates by $433 million and was up 25.6% year-over-year. At the bottom line, Block’s EPS, in non-GAAP measures, came to 39 cents per diluted share, 2 cents better than the forecast. The headline figure for the company’s earnings release was the gross profit, which totaled $1.87 billion. The bulk of this came, by far, from Square and Cash App. Square saw a gross profit of $888 million, and Cash App of $968 million. These gross profit figures represented y/y gains between 18% and 37%.
Goldman Sachs analyst Michael Ng, looking at Block’s performance and potential, sees plenty of reason to believe that the company will continue to deliver gross profit growth on that scale.
“SQ’s 2H outlook for 21% company gross profit growth, combined with its raised 2023E EBITDA outlook, supports the positive investment thesis that standalone Cash App should realize >20% gross profit growth and Square could achieve DD% gross profit growth despite the challenging macroeconomic backdrop, which is evidence of the secular tailwinds in each respective businesses. Growth should be driven by continued growth in Cash App users, increasing inflows into the ecosystem (strong momentum with direct deposit from Cash App Taxes), and Square expansion upmarket and into vertical software solutions,” Ng opined.
Quantifying his stance, Ng puts a Buy rating on SQ, and he gives it a $110 price target to suggest a potential upside of 106% in the year ahead. (To watch Ng’s track record, click here)
Overall, of the 27 recent analyst reviews on Block’s shares, 21 are to Buy compared to 6 Holds, giving the stock a consensus rating of Strong Buy. The average price target here, at $87.25, implies ~64% increase from the $53.24 current trading price. (See SQ stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
