Goldman Sachs' 4 preferred small and mid-cap stocks going into earnings season

This year's earning season is possibly the most anticipated edition in years, with one question dominating all others: how will earnings hold up amid higher rates, tighter credit, and a more cautious consumer?

Will strong balance sheets be enough to see companies through relatively unscathed, or will the headwinds see them grind to a halt?

Of course, what happens to the companies and what happens to their share price are two different things. It all comes down to what the market has already priced into stock prices, and whether the bottom line and guidance beats or misses those expectations. 

In this wire, I summarise Goldman Sachs' earnings season outlook for Aussie small- and mid-caps, including the four preferred stocks on their conviction list. 

(If you want to compare and contrast this with a similar writeup for last earnings season, albeit from Morgan Stanley, I suggest you check out this piece from my colleague Kerry Sun.)

State of play

Goldman Sachs' overall outlook for earnings season is glass half full. 

"Overall, we believe demand has remained resilient through FY23 across our coverage, particularly for technology names benefiting from continued strength in IT spending and cloud tailwinds."

Their focus remains squarely on two things: balance sheets and margins, "given the dual headwinds of (1) rising inflation across the cost base, especially wages; and (2) higher interest rates, magnifying the bottom-line earnings risk for companies carrying floating rate debt." 

Macquarie Technology Group (ASX: MAQ)

Macquarie Technology Group (MAQ), formerly Macquarie Telecom, provides telecommunication, cloud computing, cybersecurity and data centre services to corporate and government customers within Australia.

In FY23, Goldman expects its revenue to jump 14% year on year to $352m, and EBITDA to increase 18% to $104m (above company guidance of $102-104m. Net Profit after Tax is expected to jump 114% to $18m. 

Between the divisions, Goldman expects the greatest earnings boost to come from the data centres (+42%)

The broker will be keeping a keen eye on any update on approval for the new Macquarie Park data centre IC3W, and the growth outlook in Cloud Services & Government. 

Lifestyle Communities (ASX: LIC)

Lifestyle Communities Limited (LIC) is based in Melbourne, Victoria develops, owns and manages affordable independent living residential land lease communities. Lifestyle Communities has twenty-six residential land lease communities under contract, in planning, in development, or under management.

Goldman is forecasting a 3% kick in revenue to $231m, fair value adjustments of -22% (to $72m, in line with guidance), and underlying NPAT up 1% to $62 million (also in line with guidance). 

All eyes will be on settlement guidance (with a potentially large increase in FY25 to meet the 1,400-1,700 target range), the balance sheet given high inventory levels in FY23E due to slow sales in Wollert and Deanside, and of course, the extent to which higher rents have offset increased inflation-derived costs. 

Data#3 (ASX: DTL)

Data3 Limited (DTL) provides information technology solutions that draw on its broad range of products and services and, where relevant, its alliances with other leading industry providers.

In terms of results, Goldman forecast a 15% jump in revenue to $2.5b, a 36% increase in revenue to $68m, and a 38% increase in revenue to $42m.  

Life 360 (ASX: 360)

Life360 (360) is a San Francisco-based technology company providing location-based services, including sharing and notifications, to consumers globally, mainly through its family networking app Life360. 

Goldman is forecasting a 24% increase in revenue to $309m, and a 241% increase in underlying EBITDA to $10m. 

Goldman expects 360 will meet its revenue targets but maintain its EBITDA targets. It's also closely monitoring the company's leverage into FY24/25, as 360 continues its journey toward profitability.