Buy this ASX tech stock for a 20%+ return: Goldman Sachs

The broker believes investors could get market-beating returns from this auto listings leader.

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There could be some big returns on offer in the tech sector still according to analysts at Goldman Sachs.

One such example is ASX tech stock CAR Group Limited (ASX: CAR).

What is the broker saying about this ASX tech stock?

According to a note out of the investment bank this morning, its analysts believe the auto listings company is well-placed for strong growth over the coming years despite some foreign exchange and Trader Interactive (TI) headwinds. It commented:

We revisit the near-term earnings outlook for CAR ahead of FY24 results, noting recent investor queries around: (1) US and AU dealer health; (2) FX; and (3) potential M&A. Overall, we remain confident that despite spot FX and TI dealer headwinds, CAR is well-placed to continue delivering 'good' earnings growth (i.e. > 10% EBITDA) & remains our preferred classified into earnings.

Goldman also highlights that the ASX tech stock's Australian business is performing strongly despite a challenging ad-market. It said:

AU trends remain robust, particularly in used, with volumes (> 95% of total) remaining solid (Ex 4-7); pricing power continues (i.e. 5-6% price increase in private, we expect 4-5% dealer increase in Sept, as used dealer margins remain strong & CAR didn't increase materially through covid), while media revenues are supported by healthy new car volumes despite the challenging ad-market. With elevated CAR domestic opex growth in 1H24 (13.4%), there is also scope to slow investment and maintain double digit EBITDA growth.

Big returns

In light of the above, the broker has reaffirmed its buy rating on the ASX tech stock with an improved price target of $41.40. Based on its current share price of $34.76, this implies potential upside of 19.1% for investors over the next 12 months.

In addition, Goldman Sachs is forecasting partially franked dividend yields of 2.1% in FY 2024 and 2.3% in FY 2025. This brings the total potential 12-month return beyond 21%, which is more than double the historical return of the share market.

Goldman then concludes by summarising its buy thesis. It said:

Carsales is the largest Auto classified domestically, in addition to having strong international operations in Korea, US (Non-auto) and LATAM. We are Buy rated on CAR as we are increasingly confident in the company's earnings momentum (both locally & globally) – forecasting +11% EPS CAGR across FY24-27E. Downside risks include: (1) Global macro trends; (2) dealer relationships; (3) FX exposure.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has recommended Car Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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