In just a blink of an eye, the software stocks have been hammered. Some of the top stocks actually have fallen back enough to become very attractive for growth stock investors with a somewhat higher risk tolerance. While the overall risk-off movements of the past week or so are largely attributed to the spike in Omicron cases, the software stocks have been hit hard even while posting very solid results and reasonable forward guidance.
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A new research report from the software team at Goldman Sachs makes the case that some of the top stocks in the sector, which are entering a seasonally strong time, are offering very solid entry points and value at current trading levels. The report said this about current valuations:

The recent software correction of 27% of Enterprise Value/ Sales in a short time span is consistent with prior corrections, which have historically averaged a peak/trough drawdown of 29%, and implies that the group is oversold in the near term. This recent correction is particularly relevant going into the seasonally strongest quarter, where we expect strong software results. Moreover, some companies have already provided positive 2022 guidance with upward bias to street expectations, thereby affirming strong software fundamentals.

The analysts are very positive on nine top software stocks and here we highlight four of the sector giants. While all are rated Buy at Goldman Sachs, 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 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.

Goldman Sachs said this about Adobe:

Our thesis is that Adobe remains firmly a growth company. Adobe is a market leading franchise with a dominant position and pricing power in its core Creative market, which is poised to grow its subscribers mid-teens driven by Digital Transformation initiatives. This leaves us with potentially several years of durable double-digit revenue, earnings, and cash flow growth. Adobe is on a path to grow revenues by 2x to 3x from current levels over the next few years, potentially entering the top ranks of software companies with $40 billion+ of revenues. Adobe’s franchise stands out as one with a loyal and growing customer base, which consider the brand to be the default tool of their profession despite several attempts by large and small competitors to change the game.

The Goldman Sachs price target for Adobe Systems is $710. The consensus analyst target is $679.76, and the closing price on Monday was $549.77 a share.

This company blew away Wall Street 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.

Goldman Sachs noted this about this industry giant:

Salesforce remains poised to be one of the most strategic application software companies in the $1trillion+ total addressable market cloud industry, in our view. With a broad and expanding platform that spans sales, service, ecommerce, marketing, BI/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.

Goldman Sachs has a $370 price target, while the consensus target is $327.34. The final Salesforce.com stock trade for Monday came in at $247.21 a share.

ServiceNow

This stock had an incredible 2021, but the recent heavy selling is offering investors an outstanding entry point. ServiceNow Inc. (NYSE: NOW) develops and sells a hosted, subscription-based suite of services designed to automate various IT department functions, such as help desk, operations management and change/release management.

The company also sells a number of applications that automate various self-service-related applications outside of the IT department, such as HR onboarding, facilities requests and governance, risk and compliance.

Top analysts across Wall Street remain very bullish on the shares, given the ramping pipeline builds and deal activity in the employee workflow category to support demand for a central platform/portal to manage employee service requests across payroll, benefits, IT support and employee onboarding to support an increasingly distributed workforce during the pandemic. The Goldman Sachs report said this:

ServiceNow’s low-code workflow platform built using a common data model on unified architecture with out of the box APIs that facilitate integration with critical applications, allows for rapid application development. We see the sentiment around the near-term guide underappreciating a business that is potentially entering 2022 with 5 straight quarters of net new ACV momentum, broad-based demand across the product portfolio, a significantly healthier renewal base with improving renewal rates, and a much larger and more productive salesforce that will likely begin to travel in the first half of 2022. ServiceNow is a net beneficiary of the pandemic as its workflow applications can replace human-intensive processes in areas where packaged applications either don’t exist or are cumbersome.

The huge $800 Goldman Sachs price objective towers above the $730.71 consensus target for Service Now stock. Shares closed at $605.37 on Monday.

This company rounds out the top picks at Goldman Sachs in the cloud software space and is another industry leader. Workday Inc. (NASDAQ: WDAY) provides enterprise cloud applications worldwide. Its applications help its customers to manage critical business functions and optimize their financial and human capital resources.
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Its Workday Financial Management application provides functions of general ledger, accounting, accounts payable and receivable, cash and asset management, revenue management and grants management, as well as project and resource management, time and expense tracking, project billing, revenue recognition, financial reporting and analytics.

It also provides Workday Human Capital Management application, which includes human resources management, such as workforce lifecycle and organization management, compensation, absence and employee benefits administration. It also includes global talent management, comprising goal and performance management, succession planning and career and development planning, as well as Skills cloud, a machine-learning-powered universal skills language to help source, utilize, develop and retain talent.

The analysts noted this about the stock’s potential:

Workday is a uniquely positioned software application company addressing massive cloud replacement cycles in a $105 billion+ total addressable market spanning human capital management (HCM), financials, analytics, planning, and procurement. The pandemic is driving customers to accelerate their digital transformation efforts so that they can operate their businesses virtually in the cloud, where we believe Workday remains well positioned to capitalize on rising cloud adoption particularly within Financials. Within HCM, we continue to view Workday as best in class with the ability to innovate and deliver new feature functionality in response to customer demand, like People Analytics, People Experience and the Talent Marketplace. Similarly, we believe the company is well positioned within cloud based financials, with an expanding portfolio of products, including procurement and planning, offering multiple paths to establishing presence within the large enterprise.

Goldman Sachs has set a $345 price target on Workday stock. The $333.59 consensus target compares with Monday’s closing share price of $269.70.

Four top software stocks for investors with plenty of risk tolerance to consider for aggressive growth portfolios. Given the current volatility and the potential for end-of-the-year selling, it may make sense to scale buy positions over a few weeks or even months to get the best pricing for new positions.

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