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4 surprising tech stocks to buy as the sector sells off, according to a top Goldman Sachs portfolio manager

February 7, 2022, 12:00 AM UTC

It’s been a rough time for tech investors of late, with the Nasdaq shaving off nearly 7% in the past month (even with a big Friday rally) as inflation pressures, rising rates, and Treasury yields heat up, all while the Street is digesting earnings (tech stalwarts like Facebook parent Meta disappointed investors). But one portfolio manager isn’t shying away from the volatile sector as we head further into 2022.

Brook Dane, a managing director and portfolio manager at Goldman Sachs Asset Management who manages portfolios including the firm’s Technology Opportunities Fund and the Future Tech Leaders Equity ETF, suggests to Fortune that “in general, with the kind of moves that we’re seeing in interest rates, we think the stocks have overcorrected based on that.” (The tech sector broadly has traded down double-digits in the past three months.)

For one, Dane is eyeing a few bold bets that he believes have individual drivers that can power through the rising-rate and tech worries.

One key area Dane is looking is software. The global software industry has fallen in-line with the broader tech market lately, but Dane believes that’s an overreaction: “High growth software specifically … is pricing in 10-year rates around 3% or a little bit north of 3%,” he estimates, according to internal Goldman Sachs research—levels he believes are higher than rates will go in 2022 (the 10-year Treasury is currently around 1.9%). Although “consensus” is that “rates are going higher, that’s bad for software,” notes Dane, he’s looked at the data and doesn’t believe that’s “structurally” a negative for the industry.

Instead, Dane argues “the growth dynamics that we’re likely to see across 2022, 2023, [and] 2024 in many of these names make particularly attractive entry points.” That’s why he says Goldman has been using the selloff as an opportunity to load up on some of their favored tech stocks—all of which have taken a haircut in share prices in recent months.

4 tech stock bets for 2022

Even in a high inflation environment, software helps businesses drive productivity and operate more efficiently, Dane notes, “which is another way of saying it helps companies get around rising cost pressures.”

One name Dane is bullish on is automation software maker UiPath. Their core product is software called robotic process automation, “which is essentially combining machine learning, machine vision, and helping automate business processes,” Dane explains. It’s taking “away repetitive tasks that people would be doing. That’s making labor more productive,” he notes—a positive for companies trying to retain or hire employees. Dane highlights the company’s fast growth, with revenues growing an estimated 46% in its fiscal year ending January 2022, and notes the business is seeing growth in their cloud products as well as for on-premise tasks. The stock hasn’t had the best ride of late to say the least, down 44% in the past six months, as Dane points to recent poor post-IPO performance (UiPath went public in April 2021) and concerns over the company’s ability to gain new customers. But Dane maintains “this is an early stage company that’s still showing the wider market the sustainability of the growth rates and their business and their customer retention.” He believes as they prove themselves, “the stock is likely to rerate.” The Street still estimates UiPath can grow revenues by over 33% in the current fiscal year, and Dane argues the company is “a very high ROI [return on investment], very good … inflation hedge from a business standpoint.”

Those trends should also boost Kingdee International Software, a China-based cloud enterprise software company, suggests Dane. He notes “you’re seeing the adoption of modern SaaS [software as a service] tools in China” where there’s a “big preference” for “home grown” products, he argues. That’s where Kingdee fits in. Dane says there is an “increased emphasis on deploying cloud technologies [in China] and seeing state-owned enterprises modernize their underlying financials and core ERP [enterprise resource planning] solutions, and Kingdee is a big beneficiary of that.” The company’s growth has been steadily strong, growing revenues by an estimated 30% in its fiscal year ending December 2021, and analysts estimate it can grow sales by around 25% in the current 2022 fiscal year. But for Kingdee and Uipath both, Dane believes they could surprise to the upside in earnings this year.

Big tech stocks like Meta are taking a hit due to Apple’s privacy changes last year, which require users to opt-in to allow companies to track them as they switch between apps—something that’s hurt some tech companies’ ad businesses (Meta said the change would cost the company roughly $10 billion in 2022). But Dane argues that AppLovin, a company that helps mobile app and game developers grow their apps and incorporate advertising, is more shielded from the negative effects of Apple’s changes. “What makes them really well suited to the market,” argues Dane, “is that combination of first party data that they can get from their own games with the ad network.” In a post-Apple-privacy-change world, where “the amount of information that ad networks can see about customers is limited, having that first party data is really a treasure,” he says. That’s evidenced in AppLovin’s earnings (with revenues up an estimated 92% in its fiscal year ending December 2021, while the Street estimates they can grow sales by about 40% in the 2022 fiscal year), and Dane believes the market is “vastly underestimating the core growth rate of this business” (the stock has traded down roughly 16% in the last month). The company also recently bought Twitter’s ad platform MoPub for around $1.1 billion, which should further expand AppLovin’s ad network, says Dane.

Dane is also optimistic about social media platform Snap, which just reported its first quarterly profit in its fourth quarter earnings, sending the stock skyrocketing. In particular, Dane believes Snap is “leading in areas like augmented reality,” and “they have a very engaged and active community.” Amid broader worries about the impacts of Apple’s privacy changes, among other things, Dane notes the stock’s valuation has “come in dramatically” (it currently trades at a forward price to earnings ratio of under 77, having traded roughly 49% lower in the past six months), which he thinks “sets it up very well.”

While tech investors might currently be white-knuckling it amid the wild swings in the market, Dane encourages them to look at history: “Over the last 20 years, we’ve seen lots of pull backs like this in the tech market where an exogenous macro factor comes in and people get concerned,” he notes. Ultimately, however, “the reason that tech and software … have done so well is that they’re driving the value across the global economy.”

And, he argues, “that’s not changing.”

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