Investment firm Goldman Sachs has revised its 2020 economic forecast, and the outlook is decidedly grim. Where just 10 days ago, Goldman was predicting that GDP would experience a 5% contraction in Q2, the update puts the forecast at a 24% second-quarter contraction. That’s a depression-style number, and Goldman does not sugar-coat it.
What the bank does do, however, is to try and extend its reading into 2H20, and looking forward the chances may not be as bad. The economy was strong as 2019 ended, and even in January and February the jobs numbers remained highly positive – and Goldman sees that underlying strength coming back in the second half. The bank predicts a sharp rebound in the third and fourth quarters, with growth hitting 12% in Q3 and 10% in Q4. Investors should expect, however, an economic contraction for the full year.
Goldman doesn’t leave their forecasts at the macro level. In a report on COVID-19’s impact on the tech sector, analyst Brian Essex adjusts his outlook on an array of stocks, in an attempt to sort the wheat from the chaff. Of the potential growth stocks, positioned to expand despite the developing recession, Essex says, “We generally prefer companies with subscription and recurring revenue models which provide durable revenue and a high degree of visibility. We also prefer a high percentage of domestic revenue with large enterprise and/or (U.S.) government exposure.”
We’ve taken three of Goldman Sachs’s Buy-side calls, and pulled their data from the TipRanks database. These are tech companies, mostly in the mid- to large- market cap range, and strong profiles in cybersecurity and data analysis. Their footprint makes them suited for remote work, giving them a step up on survival in the coronavirus epidemic, while their firm position in the information economy gives them a steady flow of business, even as economies stutter.
FireEye, Inc. (FEYE)
The first GS stock pick we’ll examine is FireEye, a cybersecurity provider for the high-end blue-chips, counting among its clients Target, JPMorgan, and Sony Pictures. Like the economy generally, FireEye ended 2019 on a high note, clearly shown by the company’s Q4 earnings. EPS came in 75% above estimates, at 7 cents, and grew 17% year-over-year. Revenue also beat both the forecasts and year-ago number, coming in at $235 million.
FireEye’s success was built on its services, which are very much in demand in a tech-based information economy. The Silicon Valley company offers its customers protection against cybersecurity and malware attacks, and analytic software to find security risks. The company brought in $889 million in revenues last year, and showed sequential earnings gains in each quarter.
In his notes on FEYE, Goldman’s Essex notes the company’s exposure to current economic strains, with potential declines in product revenue, but goes on to point out FireEye’s larger strengths: “We expect Incident Response and Threat Intelligence to gain traction as organizations look to investigate and secure their IT infrastructure without the need for physical intervention. Additionally, approximately 25% of the company’s revenue is government related, which we view as one of the more stable sources of revenue in this environment.”
In mild deference to the current hard times, Essex lowers his price target on FEYE by $2, to $16, but still sees an impressive 65% upside to the stock. His Buy rating is an upgrade from neutral, reflecting that growth potential. (To watch Essex’s track record, click here)
FireEye has a Moderate Buy analyst consensus rating, based on an even split between 4 Buys and 4 Holds. The share price is down to $11, making this tech company highly affordable, and the average price target of $19 suggests room for 74% growth in the next 12 months. (See FireEye stock analysis on TipRanks)
Palo Alto Networks (PANW)
The second cybersecurity company on Goldman Sachs’ list is another Silicon Valley denizen. Palo Alto Networks develops secure cloud systems and advanced firewalls, essential software in the growing cloud computing segment. Malware attacks were up in 2019, and PANW’s services were in high demand.
That demand can be seen in the company’s recent fiscal Q2 report. The results are interesting, because they cover a period including both the end of 2019 and January 2020, and so include the beginning of the coronavirus epidemic. Q2 earnings were solid, at $1.19 per share they beat the forecast by 6.3%, but also down year-over-year. Revenue missed the estimate by 3.1%, but the $816.7 reported showed strong yoy growth. At the end of Palo Alto’s fiscal Q2, PANW shares were up 5.1% year-to-date; but as the bottom fell out of the market, the stock is now down 36% ytd.
Still Palo Alto Networks is a well-established company in an essential software niche, and Essex sees that foundation as the key point. He reiterates his Buy rating on the stock, although he does reduce his price target by 26% to $195. The new target still implies a 21% upside for the stock. (To watch Essex’s track record, click here)
In his comments, Essex outlines the company’s strong points, saying “[A] meaningful installed base continues to drive maintenance revenue growth, and we believe this revenue is durable over time. We expect the stock to re-rate higher once fundamentals normalize, and view sufﬁcient runway for multiple expansion for PANW, driven by traction with next-gen security solutions and inﬂection in product revenue growth.”
This stock has attracted plenty of interest from Wall Street’s analysts. PANW’s analyst consensus rating is a Moderate Buy based on 29 reviews, which include 17 Buys against 11 Holds and 1 Sell. The stock is not cheap – it sells for $166.28. The $232 average price target indicates a potential upside of 43% for the shares. (See Palo Alto Networks stock analysis on TipRanks)
Verint Systems (VRNT)
Last on today’s list of tech recommendations from Goldman Sachs is data analysis company Verint Systems. Verint produces both software and hardware for business intelligence, customer engagement, security, and surveillance analytic systems. The company caters to thousands of corporate clients in 150 countries worldwide.
In a fascinating move, Verint announced in December that it will be splitting into two independent public companies. The move will separate Verint’s $1 billion customer engagement business from its $500 million cyber intelligence segment, as the current combination is considered too large and unwieldy by management. The planned split will be conducted in stages through 2020, with completion scheduled just after the fiscal quarter ending in January 2021. As part of the split, VRNT is initiating a $300 million share buyback program.
At the same time it announced the planned split, Verint also announced fiscal Q3 earnings. EPS beat both the forecast and the yoy number, coming in at 94 cents. Revenues, at $331 million, edged over expectations and grew 7.4% year-over-year.
In his comments on Verint, Essex acknowledges that the planned split of the business segments is a risk factor – but it is a known risk factor. He points out Verint’s current status: “Our numbers are not changing materially as we believe our numbers were previously relatively conservative and the company has already migrated away from more volatile hardware and integration revenue.”
As with the other stocks on this list, Essex is lowering his price target. At $49, the new target suggests room for a 22% upside and supports his Buy rating. (To watch Essex’s track record, click here)
This stock is another Moderate Buy from analyst consensus view, based on 2 recent Buy ratings. At $58, the average price target implies a premium of 45% from the current share price of $41. (See Verint stock analysis on TipRanks)