The Impact of Asset Intensity on Stock Performance: An Analysis

The Impact of Asset Intensity on Stock Performance: An Analysis

Goldman Sachs recently announced the outperformance of its new stock basket over the past 20 years. The firm’s portfolio strategy desk introduced two new baskets based on corporate asset intensity, aiming to identify companies with high growth potential. This strategy divides stocks into two categories: asset-light and asset-heavy, based on their ratio of assets to revenues. Asset-light stocks are considered “lean” companies with minimal assets but strong growth, while asset-heavy stocks have a higher ratio of assets to revenues.

Performance Analysis

Goldman Sachs conducted back-testing on the two baskets and found that the asset-light cohort has outperformed the high-asset intensity group by 40 percentage points since 2002. The superior return on equity of the asset-light stocks (22% vs. 15%) explains this long-term outperformance. Analysts predict that the asset-heavy class could potentially outperform by around 100 basis points over the next 12 months as the cost of capital falls. Additionally, greater-than-expected capital expenditures would serve as a tailwind for the asset-heavy class.

One of the asset-light companies identified by Goldman is semiconductor giant Nvidia, with an asset intensity ratio of 0.5. Nvidia has shown impressive year-to-date returns of 73.1% and has the highest market cap on the list. Analysts predict a significant earnings per share growth of 87% by 2024. However, the average price target suggests that Nvidia’s share prices may have peaked.

Another asset-light company in the basket is Broadcom, with an asset intensity ratio of 0.3. The stock has seen a 27% increase in 2024, and consensus earnings per share growth is expected to be 19% higher than in 2023. While most analysts rate Broadcom as a strong buy or buy, the average price target implies a potential 13% pullback from current levels.

Match Group, an online dating platform operator, is another asset-light company featured by Goldman. Despite a 4% decline in 2024, analysts believe the stock could rally by 25.5%. Live Nation Entertainment, with an asset intensity ratio of 0.4, has surged by 36% in the past 12 months. Analysts predict a 44% per-share earnings increase in 2024. Both Match Group and Live Nation are strongly recommended by analysts.

On the other hand, some asset-heavy companies in the S & P 500 include chipmakers Micron Technology, Intel, and On Semiconductor, along with telecommunication services names AT & T, Verizon, and T-Mobile. These companies have higher asset intensity ratios, indicating a greater amount of assets relative to their revenues.

Analyzing the impact of asset intensity on stock performance provides valuable insights for investors. Asset-light companies have shown significant outperformance over asset-heavy companies in the past 20 years. However, it is essential to consider both asset-light and asset-heavy stocks in a diversified portfolio to mitigate risks and maximize returns. Goldman Sachs’ new stock baskets based on asset intensity offer a unique approach to identifying companies with high growth potential and superior returns. Investors should conduct thorough research and due diligence before making investment decisions based on asset intensity ratios.


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