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Goldman Sachs recently set a quite bullish S&P 500 Index ($SPX) target for the end of 2025 at 6,500. Notably, Goldman strategists, led by David Kostin, see parallels with President-elect Donald Trump’s book “Art of the Deal.”
“Some people have a sense of the market, and some people don’t,” per Trump's 1987 tome. The strategists said that those with sense embraced the “Magnificent Seven” and Trump’s philosophy: “To me, it's very simple: if you are going to be thinking anyway, you might as well think big.”
The Goldman team noted that the “Magnificent Seven” group is expected to outperform the other 493 companies in the S&P 500 in 2025 by 7 percentage points, which would be the smallest margin of outperformance in seven years: “Although the ‘micro’ earnings growth story supports continued Magnificent 7 outperformance, more ‘macro’ factors such as economic growth and trade policy lean in favor of the S&P 493. Valuation of both cohorts of stocks are elevated vs. history but trade close to fair value,” they said.
Goldman analysts categorized a number of companies into three groups: those seen as potential M&A targets, those with exposure to small and medium-sized businesses, and those benefiting from AI-enabled revenue. While no companies appear in all three categories, a few - including Meta Platforms (META), DigitalOcean Holdings (DOCN), and HubSpot (HUBS) - are included in two of them.
Let’s have a closer look at these stocks.
1. Meta Platforms
Meta Platforms (META), previously known as Facebook, is renowned for its social media platforms like Instagram, Threads, and WhatsApp. Recently, however, it has pivoted from its social media dominance to focus on becoming a frontrunner in the emerging fields of virtual reality (VR) and the metaverse. META’s market cap currently stands at $1.41 trillion.
Shares of the Facebook parent have delivered outstanding returns of about 58% year-to-date.
Goldman's View on META Stock
Goldman analysts believe that Meta’s exposure to small and medium-sized businesses, combined with its advantage from artificial intelligence (AI)-enabled revenue, should position the company for outperformance in the upcoming year.
Goldman Sachs maintains a “Buy” rating on META stock with a price target of $636, suggesting a potential upside of 13.7% from its closing price last Friday.
How Did META Perform in Q3?
On Oct. 30, Meta Platforms reported Q3 results that beat on top and bottom lines. However, META stock slid more than 4% in the following trading session as investors reacted cautiously to CEO Mark Zuckerberg’s statement that the company would keep investing heavily in AI and other futuristic technologies.
Meta’s total revenue grew 19% year-over-year to $40.59 billion, beating Wall Street’s consensus by $280 million. Advertising remains Meta’s core business, which accounted for about 98% of its total revenue in Q3.
Key metrics showed modest growth, with the Family of Apps Daily Active People (DAP) count hitting 3.29 billion in September 2024, a 5% increase from the previous year. In the Q3 earnings call, management emphasized that advancements in Meta AI and other GenAI tools are boosting daily usage year-over-year across its platforms, with enhanced AI algorithms and predictive systems improving content recommendations.
Also, the Average Revenue Per Person (ARPP) increased by 12% year-over-year to $12.29. Management attributed this improvement to AI tools, which enhanced ad conversion rates by 7%. Overall, the increase in DAP and ARPP underscores Meta’s consistent ability to grow the value of its platform. Looking forward, the company anticipates total revenue for the fourth quarter to range between $45 billion and $48 billion.
It’s also noteworthy that the company is actively developing a new market focused on Augmented Reality and Virtual Reality services. Revenue from its Reality Labs segment increased by 29% year-over-year to $270 million, fueled by hardware sales. However, the segment’s operating loss widened by 18%, totaling $4.4 billion compared to a loss of $3.7 billion in the same quarter last year. Despite the high uncertainties surrounding this business, Zuckerberg remains dedicated to its long-term growth. The CEO reiterated that Reality Labs represents a long-term investment aimed at transforming the way people interact with friends, perform tasks, and conduct transactions in virtual environments.
Meta’s efforts to manage expenses have been effective, resulting in a solid operating margin of 43%, up from 40% the previous year. Although overall expenses rose due to significant investments in AI and Reality Labs, the company reduced administration and general costs relative to revenue. Its earnings per share stood at $6.03, topping expectations by $0.74.
Meta returned $10.2 billion to shareholders in Q3, including $8.9 billion in share repurchases and $1.3 billion in dividends.
META has rapidly increased its investments in AI and virtual/mixed reality in recent quarters. Capital expenditures were $9.2 billion in Q3, mainly directed toward infrastructure to enhance AI-driven features across Meta’s platforms. Moreover, the company increased the lower end of its full-year capex guidance by $1 billion, adjusting the range to $38 billion to $40 billion. Management also indicated “significant capital expenditure growth in 2025.”
“Given this, along with the back-end weighted nature of our 2024 capital expenditures, we expect a significant acceleration in infrastructure expense growth next year as we recognize higher growth in depreciation and operating expenses of our expanded infrastructure fleet,” Meta added.
META Stock Valuation and Analysts’ Estimates
According to Wall Street projections, META is expected to post an impressive 52.12% year-over-year EPS growth to $22.62 in fiscal 2024, while revenue is estimated to grow 20.66% year-over-year to $162.78 billion.
In terms of valuation, META stock is trading at 24.72 times forward adjusted earnings - well above the sector median of 13.44x, but close to its five-year average of 23.23x. I believe the stock is reasonably valued at current levels. Should the company further capitalize on its AI capabilities and Reality Labs continue to experience solid growth, the multiple will likely go even higher.
What Do Analysts Expect For META Stock?
Analysts have deemed META stock a “Strong Buy,” with an average target price of $651.34, indicating an upside potential of 16.5% from Friday’s closing price. Among the 51 analysts covering the stock, 43 rate it as a “Strong Buy,” two as a “Moderate Buy,” four recommend a “Hold,” and two consider it a “Strong Sell.”
2. DigitalOcean Holdings
Valued at a market cap of $3.65 billion, DigitalOcean Holdings (DOCN) is a cloud provider that focuses specifically on serving small-to-medium businesses, early-stage startups, and individual developers. DOCN stands out from large competitors by offering a simpler product at lower prices, gaining wide community adoption, and offering strong customer support. As of Sept. 30, the company served over 600,000 customers in about 190 countries.
Shares of the cloud software provider have gained 9.2% on a year-to-date basis.
Goldman's View on DOCN Stock
Goldman analysts have placed the company in two of its three baskets, anticipating that its engagement with small and medium-sized businesses and its position as a beneficiary of AI-enabled revenue will lead to solid returns in 2025.
Goldman Sachs has a “Buy” rating on DOCN stock, with a price target of $42.
DigitalOcean Slips Despite Upbeat Q3 Results & Guidance Raise
On Nov. 4, DigitalOcean stock plunged over 13%, even after reporting better-than-expected Q3 results and raising its FY24 revenue guidance.
DOCN reported revenue of $198.5 million, up 12% year-over-year, beating consensus estimates by $1.71 million. The primary driver of revenue growth was the Average Revenue Per Customer (ARPU), which rose 11% year-over-year to $102.51, marking the third consecutive quarter of accelerated year-over-year ARPU growth. The increase in ARPU indicates that the company is successfully strengthening its relationships with existing customers, prompting them to use more services and features.
Net dollar retention rate remained at 97% for the third consecutive quarter, demonstrating DOCN’s strong customer retention and consistent revenue generation from its existing base, a crucial factor for long-term growth. In addition, the number of Builders and Scalers, customers who spend over $50 per month, increased to 163,300 from 154,300 in a year ago quarter. This segment now accounts for 88% of the total company revenue, up from 86% in Q3 2023, underscoring the success of DOCN’s strategy to focus on high-value customers.
Turning to profitability, DOCN reported adjusted EBITDA of $87 million, an increase of 14% year-over-year. The adjusted EBITDA margin reached 44% for the quarter, an improvement of roughly 200 basis points over the previous quarter, primarily due to the company’s continued discipline in managing operating costs. Its adjusted EPS grew 18% year-over-year to $0.52, topping expectations by $0.12.
DigitalOcean will likely experience accelerated growth in the coming years, largely driven by its AI strategy, which focuses on innovating platform and application layers to facilitate GenAI usage at scale for customers lacking advanced AI/ML expertise. Currently, DOCN offers three main AI products: GPU Droplet, Infrastructure-as-a-Service for AI, and Platform-as-a-Service for AI. These products enable the company’s SMB customers to access GPU/computing resources more effectively without committing to full capacity, catering to their lower base requirements while also meeting peak demand needs.
Notably, DOCN introduced the early availability of its new GenAI platform to select customers in the third quarter. This allows the company to iterate with these customers to refine the product, ensuring it remains user-friendly for building GenAI applications that provide real business value. Given the robust demand for AI, DOCN is poised to attract customers who require additional AI and GPU computing resources, which is expected to accelerate its top and bottom line growth.
“We continued to accelerate innovation, releasing 42 new product features across our core Cloud and AI platforms in Q3, that directly meet the needs of our larger customers. We made solid progress towards our objective of democratizing access to AI infrastructure and becoming a software-centric AI platform for growing digital-native companies,” said Paddy Srinivasan, CEO of DigitalOcean.
DOCN’s balance sheet continues to be very strong, ending the quarter with $440 million in cash and cash equivalents. During the quarter, the company generated $26 million in adjusted free cash flow and allocated $11 million to share repurchases. With a solid cash position and ongoing generation of free cash flow, DOCN is well-positioned to maintain a balance between investing in organic growth and executing share repurchases.
Encouraged by the company’s year-to-date performance, management raised the lower end of FY24 revenue guidance by $5 million and the upper end by $2 million, forecasting revenue to be between $775 million and $777 million. Also, adjusted EPS is expected to be $1.70 to $1.75. In addition, management boosted the adjusted EBITDA margin guidance by 250 basis points to 40-41%.
When it comes to the post-earnings sell-off, investors were likely disappointed for two main reasons. First, the company provided Q4 adjusted EPS guidance in the range of $0.27 to $0.32, falling short of the consensus estimate of $0.38. Also, management indicated that they anticipate entering 2025 with baseline revenue growth in the low to mid-teens, disappointing investors who were expecting higher growth rates.
DOCN Valuation and Analysts’ Estimates
Analysts tracking the company predict a 9.92% year-over-year increase in its EPS to $1.75 for fiscal 2024. Also, Wall Street expects DOCN’s revenue to grow 12.02% year-over-year to $776.17 million. Moreover, the company is anticipated to experience accelerated revenue growth in the coming years, surpassing the $1 billion threshold in annual revenue in fiscal 2027.
In terms of valuation, priced at 22.66 times forward adjusted earnings, the stock trades at a discount compared to the sector median of 25.40x and its five-year average of 81.39x. Undoubtedly, the stock is attractively valued at current levels, particularly if growth picks up due to its AI strategy.
What Do Analysts Expect For DOCN Stock?
Analysts have a consensus rating of “Moderate Buy” on DigitalOcean stock, with a mean target price of $41.09, which is roughly in line with Friday’s closing price. However, the Street-high price target of $48.00 suggests that the stock could rally as much as 21.2%.
Out of the 13 analysts providing recommendations for the stock, six rate it as a “Strong Buy,” six advise a “Hold,” and one assigns a “Moderate Sell” rating.
3. HubSpot
HubSpot (HUBS) is a provider of marketing automation and customer relationship management (CRM) software. It is renowned for its user-friendly software-as-a-service (SaaS) platform tailored for SMBs, which has enabled it to build a loyal customer base and consistently increase its revenue. The company’s market cap currently stands at $38.34 billion.
Shares of the marketing software company have rallied about 29.5% on a year-to-date basis.
Goldman's View on HUBS Stock
According to Goldman, the company is placed in the same two baskets as META and DOCN, as the brokerage firm expects that its strategy to target SMBs and its role as a beneficiary of AI-enabled revenue will allow it to perform well in 2025.
Recently, Goldman Sachs analyst Gabriela Borges reiterated a “Buy” rating on HUBS stock and raised the firm’s price target to $690 from $626.
HubSpot Pops on Upbeat Q3 Results & Guidance
On Nov. 7, HubSpot stock climbed over 7% after reporting better-than-expected quarterly results and offering strong full-year guidance. Notably, the stock extended its post-earnings rally, climbing an additional 8.6% over the next three trading sessions.
HubSpot’s revenue increased by 20% year-over-year to $669.7 million, beating Wall Street’s expectations by $22.43 million. Its total revenue growth was fueled by a rise in subscription revenue, which increased due to a growing customer base. Notably, the company grew its total customer count by 23% year-over-year to 238,128, adding more than 10,000 net new customers in Q3. What stands out most is HubSpot’s ability to continue signing new customers at an aggressive pace, even as many software companies cite challenging macroeconomic conditions. HUBS also maintained healthy customer dollar retention rates in the high 80s.
However, Average Subscription Revenue Per Customer (ASR PC) remained under pressure, declining 2% year-over-year to $11,235. At the same time, the company has prioritized customer growth and new sign-ups over ASR PC, reducing prices in its smallest tiers to encourage more small business sign-ups. Management noted that billings for the quarter rose 24% year-over-year to $681 million, suggesting that a near-term slowdown in revenue is unlikely.
In terms of profitability, the company expanded its pro forma operating margins by 220 basis points year-over-year to 18.7%. Its adjusted EPS came in at $2.18, beating estimates by $0.27.
Hubspot reported $2.1 billion in cash and marketable securities at the end of the quarter, as well as $129 million in free cash flow. This solid cash balance should support the company’s continued product and AI innovation.
A highlight of the third quarter was undoubtedly the company’s Annual Inbound Conference, where it introduced a substantial array of AI innovations that received positive feedback from customers and partners. While Inbound featured over 200 new innovations, the standout moments included the launches of Breeze and Breeze Intelligence. Notably, Breeze is HubSpot’s AI that powers the entire platform, including Copilot, agents, new features, and an agent marketplace. The company’s strategy involves integrating AI across every hub and throughout the entire platform to democratize AI for scaling companies.
Since launching Breeze, HUBS has observed a significant rise in AI awareness, adoption, and usage. AI awareness within HubSpot increased by 13% quarter-over-quarter, with two-thirds of enterprise customers and half of professional customers engaging with AI features. Moving on, Breeze Intelligence performs three key functions. It enriches company and contact data with over 200 million data points, gives buyer intent signals to prioritize prospects, and when those prospects visit their website, shortens fonts to improve conversion - all seamlessly integrated out of the box in HubSpot, although it remains in beta. With ongoing product and AI innovation, the company is poised to maintain its competitive edge, which bodes well for its long-term growth prospects.
Looking ahead to the full year of 2024, management anticipates revenue to range from $2.597 billion to $2.599 billion, representing a 20% year-over-year increase at the midpoint. Also, adjusted net income per common share is projected between $7.98 and $8.00, based on an estimated 53.4 million weighted average diluted shares outstanding.
HUBS Valuation and Analysts’ Estimates
For fiscal 2024, analysts tracking the company predict a solid 35.84% year-over-year rise in its EPS to $8.00, with revenue expected to climb 19.72% year-over-year to $2.60 billion.
From a valuation perspective, HUBS stock appears overly expensive at current levels, despite its anticipated strong growth. Its forward P/E and EV/Sales multiples are 92.82x and 14.30x, respectively, both over 200% higher than the sector median. Investors should consider that such a premium exposes the stock to a heightened risk of near-term correction.
What Do Analysts Expect For HUBS Stock?
Analysts have a consensus rating of “Strong Buy” on HubSpot stock. Out of the 28 analysts covering the stock, 20 analysts recommend a “Strong Buy,” three advise a “Moderate Buy” rating, and the remaining five recommend a “Hold.”
Notably, the stock trades at a premium to its mean price target of $712.08, while the Street-high target price of $835.00 suggests an upside potential of about 12.4%.
