Depressed tech valuations could offer entry point for investors, Goldman Sachs says

Goldman Sachs flags a buying opportunity in tech as IT EPS are forecast to grow 44% and account for 87% of S&P 500 index EPS growth in Q1, while earnings revisions remain notably positive. Valuations are depressed: hyperscaler valuation premium has fallen to near parity with the rest of the sector and global IT P/E is below discretionary, staples and industrials. Drivers include the release of China’s DeepSeek AI model, heavy hyperscaler capex and AI-driven software disruption, while the Iran war increases tech’s defensive appeal given relative cash-flow insensitivity and potential upside from a rally in bond yields.

Analysis

Positioning into technology today is not a pure growth/value play — it is a convexity bet on where incremental AI compute demand lands over the next 6–18 months. Hyperscaler capex and third-party server demand create a two-track market: OEMs and systems integrators see near-term revenue leverage from rack-level buys, while silicon and chip-stack incumbents face margin compression as customers internalize stacks or negotiate rekated licensing.

Geopolitical risk (Iran) is a nonlinear catalyst: commodity-driven inflation pressure would tend to lift nominal yields and input costs for chip fabs, hurting margin-exposed suppliers; conversely, a spike in risk aversion could push real yields down and rotate cash into long-duration software/IP names. That conflict makes short-dated rates moves the largest near-term swing factor for relative P/E normalization across IT names.

Second-order supply-chain effects matter: if hyperscalers favor vertically integrated designs, smaller OEMs with flexible BOMs (shorter lead times, modular designs) capture incremental share while legacy silicon vendors face elongated revenue cycles. That dynamic amplifies winners among server OEMs and software/monetization plays (adtech/AI tooling) versus broad-based semiconductor capitalizations.

Consensus underweights idiosyncratic execution and monetization outcomes — not just macro multiples. Watch revision cycles from the two largest cap-weighted names: positive EPS revisions will re-concentrate flows even if sector P/E stays depressed, so alpha will come from names whose earnings revisions decouple positively from headline sector rotation.

Key Decisions for Investors

• Long SMCI (Super Micro): buy a 3–6 month ITM call spread or 100–200 bps underlying exposure at market. Target 30–50% total return in 3–9 months if hyperscaler rack orders persist; stop 18–22% on downside or a single-quarter guide-down. Rationale: highest sensitivity to immediate server cycle, asymmetric upside from outsized order beats; downside concentrated in a short, visible revenue miss.
• Long APP (AppLovin): buy 6–12 month LEAPS (or 20–30% position in equity) with a 40–60% target and 25% stop. Rationale: adtech monetization and AI-driven app engagement can re-rate multiple quickly as ad CPMs recover and LTV improves; execution risk is ad demand and user retention metrics over next 2 quarters.
• Pair trade — Long SMCI / Short AVGO: construct a 6–12 month pair (equal $ notional) to express exposure to systems-level upside vs semiconductor multiple compression. Target 25–40% pair return if hyperscalers favor OEM refresh and Broadcom’s licensing/pricing gets constrained by competition; cut pair if AVGO reports >5% upside in gross margin or SMCI reports >10% inventory buildup.
• Macro hedge: buy 2–4 week put protection on a tech-heavy ETF or purchase a modest position in 10y Treasury futures if Iran-related headline risk pushes volatility higher. Exit on 20–30% realized vol jump or after clear geopolitical de-escalation. Rationale: short-dated rate/yield moves are the primary risk vector for sector rotations over the next 30–90 days.