Rating 3 of Goldman Sachs’s Top Growth Stock Picks
My criteria for identifying the top growth stock picks are fairly simple and straightforward. In general, I try to identify names that can benefit from strong, ongoing macro trends and whose businesses are growing rapidly or are very well-positioned to do so.
And of course, I only recommend names whose valuations are reasonable, since stocks with ridiculously high valuations usually tumble sharply eventually.
In general, I greatly respect Goldman. As I wrote recently, the firm “in good economic times and bad ones, seems to always generate strong financial results.” That’s partly because Goldman excels at trading stocks.
Moreover, anecdotally, I’ve found that the firm’s analysts often provide very high-quality, successful stock picks.
Still, as a pundit whose top growth stock picks sometimes outperform those of the Street’s largest firms over the longer run, I thought that many readers would be interested in seeing my take on a few of Goldman’s top picks.
These stocks were identified by Goldman as being likely to reward investors during the next bull market.
| PUBM | PubMatic | $22.57 |
| LYFT | Lyft | $19.34 |
| ROVR | Rover Group | $4.29 |
PubMatic (PUBM)
Since I own PubMatic (NASDAQ:PUBM) stock, I’m very upbeat about this pick by Goldman.
As I reported in a previous column, the company is highly leveraged in the very rapidly growing online video and connected TV market. According to TechCrunch streaming ad revenue grew 57% in 2021 and is expected to grow another 39% this year.
PubMatic is benefiting from a strong, growing trend, and its valuation is reasonable. The company’s forward price-sales ratio is an undemanding 2.8 ($3.33 billion average 2023 sales estimate/its $1.9 billion market capitalization). Moreover, the company generally is profitable.
Finally, it recently reported strong Q2 results. Specifically, its earnings per share, excluding certain items, came in at 23 cents, versus analysts’ average outlook of 15 cents. PubMatic reported that its sales jumped 27% year-over-year to $63 million, compared with analysts’ mean outlook of $60.06 million.
Lyft (LYFT)
Lyft (NASDAQ:LYFT) is well-positioned to benefit from consumers’ pent-up demand for experiences. With many consumers going on vacations this summer and the number of getaways in the fall and winter likely to exceed normal levels, Lyft’s ridesharing services should surge.
The company’s Q2 report showed an EPS, excluding certain items, of 13 cents, well above analysts’ average outlook of a per-share loss of 4 cents. Its top line came in at $991 million, a bit above the mean outlook of $988 million.
The company reported record EBITDA, excluding certain items, of $79 million. In a note to investors, prominent Wedbush analyst Dan Ives wrote that Lyft had delivered “an impressive EBITDA performance.”
Moreover, given the company’s fiscal 2024 outlook for adjusted EBITDA of $1 billion and free cash flow of $700 million, Ives thinks that the company is prudently reducing its spending, and he contended that the firm is “back on track.”
With Lyft trading at an attractive forward price-revenue ratio of just 1.3 (market cap of 6.8 billion/analysts average ’23 sales estimate of $5.09 billion), LYFT stock is a “buy” for short-term and medium-term investors.
Rover Group (ROVR)
I’m much less enamored by Goldman’s selection of Rover Group (NASDAQ:ROVR) as a top pick for the next bull market. The company operates a website that allows pet owners to find providers of services for pets.
One the one hand, the pet sector has grown tremendously in America and, with many owners spending a great deal of money on their animal companions, it can be very lucrative. Additionally, since many pet owners are taking vacations due to the pent-up demand for getaways, Rover can benefit from that trend.
However, Rover is operating in a business with low barriers to entry, since it’s not difficult to launch a Craigslist-like website for pet owners. Consequently, the company is likely to face a great deal of tough competition.
Indeed, tougher-than-expected competition may explain why Rover recently reported weaker-than-expected Q2 results.
Given these points, I urge investors to avoid ROVR stock at this point.
On the date of publication, Larry Ramer owned shares of PUBM.
