Unprofitable growth stocks to remain under pressure from higher interest rates By Investing.com

In recent years, unprofitable growth stocks have been heavily impacted by changes in inflation and interest rates. This sensitivity is mainly due to their long duration profiles and the need to finance operations through alternative means.

According to Goldman Sachs strategists, stocks expected to become profitable this year or next have decreased by 4% year-to-date. Meanwhile, companies projected to reach profitability in 2026 have seen a 15% decline, and those expected to be profitable after 2026 have experienced a significant drop of 28%.

The EV/Sales multiples for unprofitable growth stocks have decreased from 14x in 2021 to 4x today. This adjustment is seen as appropriate in response to the changing interest rate environment, as noted by Goldman strategists.

Unprofitable growth stocks are particularly vulnerable to rising interest rates due to their long-duration cash flows and forward-looking financial projections. These stocks, which are expected to achieve significant sales growth compared to the average Russell 3000 company, face greater valuation pressure from higher discount rates. The increased cost of capital makes it more challenging for them to raise necessary funds, often leading them to issue dilutive equity or high-cost debt, or to pursue acquisitions.

The valuation contraction of unprofitable growth stocks reflects the changes in the interest rate environment, which has seen a sharp increase following historically low rates and economic optimism in late 2020.

Looking ahead, with forecasts suggesting that the 10-year US Treasury yield will remain above 4% through 2025, there is limited potential for valuation upside for unprofitable companies without a near-term path to profitability, according to Goldman’s team.