Apps & Software
Top Wall Street Analyst Cuts Price Targets on Large-Cap Software Leaders
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After technology, and specifically software, outperformed in a big way in 2020, the tables are finally starting to turn. While the top companies in the industry are still the place to be, some of the stratospheric price targets are being brought down, and with good reason. Despite the recent selling pressure on the group, the top stocks are still trading above their six-year average, and the compression in multiples looks like it will continue in the space.
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In a new Jefferies research report, outstanding software analyst Brent Thill and his team have lowered the price targets on some of the top stocks. While they retain Buy ratings on many of the leading companies, they are lowering price targets on 70% of the stocks in their coverage universe. The report said this:
Valuations have taken a near-term breather contracting 19% year-to-date versus expanding 56% in 2020, 26% in 2019 and 7% in 2018. Valuations for quality software names are still 15-20% above trough levels (~5x revenue). Overall valuations are at 9.9 the next 12 months revenues or 10% above 9x (1 standard deviation above average) indicating some more near-term downside. We continue to be positive long-term, given the strong fundamentals. Multiples have contracted 19% in 2021. Quality names are still 15-20% above trough levels (5 times revenue). Fundamentals are still very strong in the space as evidenced by multiple prints.
It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Adobe Systems
Shares of this high-profile legacy software company have backed up some, 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.
Jefferies lowered its $610 price target on the shares to $560, below the Wall Street consensus target of $571.43. Wednesday’s final Adobe Systems stock trade was at $480.47 a share.
Intuit
This company hits all the metrics in the technology sector for accounting needs. Intuit Inc. (NASDAQ: INTU) is a provider of business and financial management solutions for small and medium-sized businesses, financial institutions, consumers and accounting professionals.
Products and services include TurboTax, QuickBooks, Quicken, small business financial management and payroll processing, personal finance and tax preparation and filing and online banking services through its Digital Insight acquisition. Intuit also offers products on a software as a service (SaaS) platform across all its business divisions.
Intuit has served small businesses and accountants with QuickBooks for more than 20 years. The company was an early innovator in cloud accounting when it first launched QuickBooks Online in 2001. QuickBooks Online has more than a million paying subscribers, cementing its market leadership as small businesses shift to the cloud.
24/7 Wall St.Over 40% of small businesses use either Quickbooks Online or Quickbooks Desktops, while 35% are using Excel or manual paper accounting.
Jefferies maintained its $460 price target on Intuit stock, which compares with the $451.61 consensus target and Wednesday’s close at $421.20.
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Microsoft
This is a more conservative way for investors to participate in the massive cloud growth, and the company has posted stellar results. 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, so that Azure may be cheaper than AWS for larger users. The cloud was big in the 2020 earnings reports and will remain a growing part of the software giant’s earnings profile.
Microsoft reported solid third-quarter results, with revenue upside driven by Azure momentum and Windows. Solid fourth-quarter guidance for sustained high teens productivity and business process growth and low 20s intelligent cloud growth bodes well for the venerable tech giant.
Holders of Microsoft stock receive a 0.88% dividend. The $300 Jefferies price target was lowered to $290. The consensus target is in line at $290.78m and the shares closed at $243.12 apiece on Wednesday.
Salesforce
This company blew away Wall Street last year 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.
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.
Top analysts feel that Salesforce remains poised to be one of the most strategic application software companies in the $1 trillion total addressable market cloud industry, with a broad and expanding platform that spans sales, service, e-commerce, marketing, business intelligence/analytics, artificial intelligence, custom applications, integration and collaboration. Many also view Salesforce as positioned well to capitalize on accelerated digital transformation spending.
Jefferies lowered the price target to $300 from $320. The consensus target is just $275.68, and Salesforce.com stock closed Wednesday at $221.34 a share.
One thing is for sure. If Thill feels the stocks are expensive, you can bet they are. We have covered the Jefferies team for years, and they have made some of the most prescient calls on Wall Street. It makes sense to scale buy shares now, and see if they don’t back up more this summer. Note that these four stocks held up well into recent selling.
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