Apps & Software
Top Analyst Says Software Stocks Are Expensive Now: 5 High-Value Conviction Buys
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With a wild first quarter finally over, it is very interesting to note that the Dow Jones industrial average beat the Nasdaq Composite Index in the first quarter by the biggest margin in about 15 years. Many investors with exposure to the Nasdaq may have noticed that in the rotation to cyclical and value names, many of the top technology stocks were hit hard, especially some of the leading software companies.
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Despite the sell-off, many top software stocks are still trading with valuations above their pre-pandemic peaks. In a new Goldman Sachs research report, Kash Rangan and the superb software team make the case that some stocks are trading with reasonable valuation. The report said this:
In our view, it is helpful to provide historical context as to the magnitude and timing of the current correction relative to prior downturn; however, we also note that despite the recent pullback valuations remain above their pre-COVID peak. On average, we note that calendar year 2021 consensus sales forecasts are roughly in line with pre-COVID estimates, while valuations have generally expanded. That said, within our broader software coverage, we highlight names where valuations have not re-rated meaningfully higher and the outlook for growth driven by accelerated digital transformation efforts is attractive.
We screened the list of stocks that the analysts like now that are trading at what the analysts feel are comparable to more attractive valuations than their pre-pandemic peaks despite the 10-year Treasury yield currently trading 20 basis points higher. We found five that make sense for aggressive growth investors looking to add software exposure to portfolios. Three of them recently were added to the Goldman Sachs Conviction list of top stock picks. It is still important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Adobe
Shares of this high-profile legacy software company have really backed up some in price and are offering investors a solid entry point. Adobe Systems Inc. (NASDAQ: ADBE) operates in three segments: Digital Media, Digital Marketing and Print and Publishing. The Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote and monetize their digital content.
Top Wall Street analysts see the company benefiting from artificial intelligence, predictive analytics, automation bots, speech recognition and natural language processing and image recognition. Flagship products include Creative Suite, Photoshop, Acrobat, Premiere, Dreamweaver, Illustrator, InDesign and LiveCycle. PDF and flash technologies from the company have become industry standards and act as a platform for other Adobe products.
The Goldman Sachs price target for the shares is $580, while the Wall Street consensus target is $565.85. Adobe Systems stock closed on Wednesday at $475.37 a share.
Coupa Software
This is a recognized leader in what is called sourcing applications. Coupa Software Inc. (NASDAQ: COUP) provides a unified, cloud-based spend management platform that connects organizations with suppliers globally. The company offers spend management cloud applications that are pre-integrated.
24/7 Wall St.The Coupa Software platform offers consumerized financial applications. Its spend management suite includes procurement, invoicing, expenses, sourcing, inventory, contract lifecycle management, budgeting, analytics, open business network, supplier information management and storefront.
The platform offers features such as procure-to-pay solution; online invoice management, and inventory management and tracking software system. Its solutions for business needs include financial compliance and mobile productivity. The company’s solutions for enterprise resource planning include Oracle and NetSuite. Coupa offers solutions for industries, including financial, health care, oil and gas, retail, technology, and food and beverage.
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Goldman Sachs is very positive on Coupa and noted this when it added the stock to the Conviction List:
Along with the rest of growth software, Coupa has traded off 23% from its high on 2/18 (versus S&P down 2% in that time frame). But we see an attractive entry point at current levels – 26x calendar year 2022 sales vs. high growth peers at 26x, despite our expectations for above-peer growth – as we believe fundamentals for Coupa are improving after a relatively brief period of disruption from the pandemic. Coupa is very much levered to the improving pace of digital transformations, specifically those taking place in the ERP suite, a category that our checks suggest is increasingly being prioritized as companies move through their wish list of system migrations. Coupa has a total addressable market of over $50 billion before taking into account the payments opportunity. This $50 billion runway includes the potential spend for its core offerings of procurement, expense management, invoice management, and community intelligence.
Late last year, Goldman Sachs raised its price target from $328 to a stunning $413. The consensus target is $342.65. Coupa Software stock popped almost 7% on Wednesday to close at $254.48.
24/7 Wall St.Microsoft
This is a more conservative way for investors to participate in the massive cloud growth and utilization. Microsoft Inc. (NASDAQ: MSFT) manufactures, licenses, and supports a wide range of software products. The company has transformed its business model from a component-driven model (personal computer, server) to one driven by the need for cloud capacity.
Many Wall Street analysts agree that Microsoft has become a clear number two in the public or hyper-scale cloud infrastructure market with Azure, which is the company’s cloud computing platform offerings, and which continues growing at triple-digit levels. Some have flagged Azure as the biggest rival to Amazon’s AWS service.
Some analysts maintain that Microsoft is discounting Azure for large enterprises, such that Azure may be cheaper than AWS for larger users. The cloud was big in 2020 earnings reports, and it will remain a growing part of the software giant’s earnings profile.
Goldman Sachs noted this:
With a strong presence across all layers of the cloud stack, including applications, platforms, and infrastructure, Microsoft is well positioned to capitalize on a number of long-term secular trends, including public cloud and SaaS adoption, digital transformation, Artificial Intelligence/Machine learning, Business intelligence/analytics, and Development Ops (amongst others). We see a pathway for sustained double-digit topline growth alongside continued margin expansion, particularly as the Commercial Cloud business continues to grow as a percentage of the overall mix.
Holders of Microsoft stock receive a 1% dividend. Goldman Sachs has a $315 price target, and the consensus target is $272.71. The shares closed at $235.77 on Wednesday.
Salesforce
This company blew away Wall Street recently with a gigantic $27.7 billion purchase of Slack Technologies. Salesforce.com Inc. (NYSE: CRM) provides enterprise cloud computing solutions, with a focus on customer relationship management to various businesses and industries worldwide.
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Salesforce’s enterprise cloud computing applications and platform services include Sales Cloud, which enables companies to store data, monitor leads and progress, forecast opportunities, gain insights through relationship intelligence and collaborate around sales on desktop and mobile devices.
The company also provides Service Cloud, which enables companies to deliver personalized customer service and support, as well as connect their service agents with customers on various devices, and Marketing Cloud, which enables companies to plan, personalize and optimize customer interactions.
Last year, Salesforce completed the acquisition of Tableau Software, bringing together the world’s number one customer relationship management company with the world’s number one analytics platform. Salesforce aims to enhance its digital advertising value proposition (and its other existing product offerings) by expanding its data footprint to become the pioneer supplier of a consumer data platform for the corporate market.
Goldman Sachs noted this they added it to the Conviction List:
Salesforce remains poised to be one of the most strategic application software companies in the $1 trillion total addressable market cloud industry, in our view. With a broad and expanding platform that spans sales, service, ecommerce, marketing, Business intelligence/analytics, artificial intelligence, custom applications, integration, and collaboration, we view Salesforce as well positioned to capitalize on accelerated digital transformation spending, as enterprises across verticals grapple to form a holistic view of their customers across an increasingly complex customer journey involving multiple touchpoints and channels.
The $315 Goldman Sachs price target compares to the $275.31 consensus target and Monday’s final print for Salesforce.com stock of $225 a share.
Splunk
This is a top tech pick across Wall Street. Splunk Inc. (NASDAQ: SPLK) provides a software platform for collecting, storing, indexing, searching and analyzing machine-generated data, such as log files and configuration files, which are prevalent in every type of IT system, device and application.
Splunk technology is potentially applicable and disruptive in several market segments, including IT operations, security and compliance, and business intelligence. These market segments are collectively worth $28 billion today.
Wall Street analysts agree that the company offers the de facto standard for security information and event management. It also offers orchestration solutions for security operations, a fast emerging category of products.
Goldman Sachs has set a $215 price target. The consensus target is $193.88, and Splunk stock ended Wednesday at $135.48 per share.
These are five top software stocks that Goldman Sachs sees as reasonable values, and all have very solid upside potential to the firm’s price targets. With first-quarter earnings right around the corner, it may make sense to buy partial positions now and see how April starts to shape up. The market remains very overbought and expensive, so caution still is in order.
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