These Three US Stocks Are Sitting Pretty On Goldman’s Conviction List

Goldman Sachs publishes its list of conviction ideas every month, pulling thoughts from its expert team of analysts. Only the investment bank’s best ideas make the conviction list, so it’s a kind of “Goldman goldmine” of potential stock winners. So, from the latest list, here are the three US stocks where Goldman sees the most glittery upside – and why.

1. WW International (WWI)

Back in the day, if you wanted to shed some serious pounds you’d have to put some miles on the treadmill, do some hard-core calorie counting, or, as a last resort, pop some weight-loss pills. For years, Weight Watchers International plumped itself in the second category, becoming famed for its regular meetups and weigh-ins. But a new wave of obesity drugs recently forced the firm (and its new leadership) into a rethink, and now it’s now spouting a more holistic approach to weight management, pulling in all three approaches and promising to give its subscribers a better, healthier lifestyle.

The company says more than 20% of its subscribers are interested in incorporating pharmaceutical diet aids into their weight-loss goals. What’s more, the firm reckons that by wrapping these drugs in a total lifestyle approach to weight management gives them a better chance of being covered by health insurance policies – immediately making them more affordable.

Now, WWI has some 20 million lapsed subscribers. If 20% of those could be enticed back into the WWI family with a refreshed suite of weight-loss solutions, then the company’s shrinking subscriber base – across both the online and meeting segments – might start to fatten up again, as it were.

Weight Watchers International online and meeting subscribers, in thousands. Source: Goldman Sachs.

The kicker, according to Goldman, is that because the firm has built up such impressive infrastructure over the years, it can offer these new services cost-efficiently, bulking up margins along the way. Weigh (ahem) all this up, and Goldman estimates that shares of WWI could be changing hands for $13 in the next 12 months – nearly double today’s price.

2. Warner Bros. Discovery (WBD)

This is something of a “special situation” idea from Goldman, who says that the combination of the two media giants – Warner Bros. and Discovery – has created an opportunity for massive cost-savings, profit growth, and debt repayment – all of which the market is currently underestimating. By eliminating overlapping costs, Warner Bros. Discovery could pocket up to $5 billion a year, according to Goldman. That’d be a sizable 15% of the firm's total costs and could lead to earnings-per-share (EPS) climbing to $2.39 in 2025 from just an estimated 34 cents this year. The extra cash from all the cost-saving moves would allow WBD to pay off a big chunk of debt too, bringing its leverage ratio – that’s debt as a percentage of profit – down from a worryingly lofty level of 5x net debt to earnings before interest, tax, depreciation, and amortization (EBITDA) – the traditional leverage ratio – to a more manageable 3.7x by the end of this year.

What that all suggests, according to Goldman, is that the stock should be re-rated – meaning investors might place a higher valuation on its shares. This chart shows that WBD (dark blue bar) trades on an enterprise value (EV) to EBITDA multiple of 6.6x, according to Goldman’s estimates. That’s in line with its media peers Comcast and Fox, even though WBD has a much brighter profit growth outlook.

WBD EV/EBITDA of 6.5x is in line with its peers, even though it’s got a better growth profile. Source: Goldman Sachs.

Now, media stocks have fallen out of fashion, with traditional cable channels – which the combined WBD owns in droves – suffering from subscriber declines while their replacement streaming services have delivered underwhelming results. But Goldman says the market’s just being overly negative here. It sees WDB’s revamped streaming offering, MAX, which lumps together Warner’s HBO and Discovery’s Discovery Plus, reaching profitability this year and growing nicely after that.

Overall, Goldman uses a sum-of-the-parts approach to valuing WBD’s shares – basically calculating the valuation for each of its distinct businesses. And on that basis, the bank says WBD’s shares could be worth $21 in a year’s time: that’s a blockbuster 50% upside.

3. Salesforce (CRM)

Ten years ago, Salesforce management used to tell prospective investors that if they wanted traditional software-like profit margins (think: 30% or more), they should go elsewhere. The reason, the execs said, was that Salesforce was determined to invest heavily to maintain its rampant sales growth. And it worked. Revenue growth generally motored along at more than 25% a year (with the odd year just a shade below that) and investors snapped up the shares – that is, right up until about a year ago, when the hefty technology spending slowdown kicked in and took everyone down with it.

Salesforce’s share price over time. Source: Koyfin.

But, as Goldman points out, CRM’s profit margins have actually been creeping higher, and through a number of cost-savings initiatives (which have intensified because of the tech spending slowdown and a trending wave of belt-tightening) are set to climb to 30% and beyond over the next few years. Goldman also believes that revenue growth – which slowed to just 11% in the firm’s most recent quarter – will pick up again. The customer relationship management software market might already be gigantic (Goldman thinks Salesforce’s total market opportunity is around $280 billion) but it’s still growing at a healthy clip. And despite being the undisputed leader, Salesforce should still be able to ride the market’s growth for quite a while yet.

And what technology stock “buy” call would be complete with a mention of AI? Goldman says infusing AI into Salesforce’s core software would bring loads of new opportunities for the firm’s clients, which would only boost revenue growth further.

Overall, the investment bank sees Salesforce’s future cash flow growth as underappreciated, and when Goldman analysts crunch the numbers they get a price target of $325 – so that’s another one with more than 50% upside potential.