For most investors, 2022 will not end soon enough. With the bulk of the fourth quarter still in front of us, and the potential for more downside, this hardly seems like the time to get aggressive on technology. However, it is important to remember what Nathan Rothschild, a 19th-century British financier, said, “the time to buy is when there’s blood in the streets.” While the panicked capitulation selling has not hit us yet, it could be very close.
[in-text-ad]
Last week’s consumer and producer price index data all but sewed up another 75-basis-point increase in early November, which will take the federal funds rate to 3.75% to 4.00%. That is starting to get close to the Federal Reserve’s terminal rate, especially if another 50-basis-points is tagged on in December. So while blood may not quite be in the streets yet, it is getting quite close.

Goldman Sachs says the way to play software now is defense in a downturn and offense in the inevitable recovery. The analysts highlighted stocks to buy for a hard and soft landing for the economy, and with much of the current data still indicating a reasonably robust economy, (one that can improve when rate increases end), we decided to focus on the soft landing ideas. The Goldman Sachs team said this when discussing software valuations now:

The average multiple compression from prior peak to trough since 2001 has been -30% which is significantly lower than the -55% peak to trough compression seen since January this year, due to a number of macroeconomic risks from inflation pressures and rising interest rates in the US and fears of a recession looming. In contrast, 2002 multiples compressed from peak to trough valuation by ~49% over ~9 months and the Global Financial Crisis in 2008 triggered a sharp -57% multiple compression over ~6 months. As part of this analysis, we also looked to identify companies who we expect to have a strong runway for long-term growth and may become more in-favor once we see signs of an economic recovery starting to take hold.

The bottom line is that we could be close to the end of the selling for the six top software stocks they like going forward. While all six are rated Buy, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

Adobe

This large cap legacy technology stock has been cut in half over the past year. Adobe Systems Inc. (NASDAQ: ADBE) operates as a diversified software company worldwide. It operates through three segments.

The Digital Media segment offers products, services and solutions that enable individuals, teams and enterprises to create, publish and promote content. Its Document Cloud is a unified cloud-based document services platform. The company’s flagship product is Creative Cloud, a subscription service that allows members to access its creative products. This segment serves content creators, workers, marketers, educators, enthusiasts, communicators and consumers.

The Digital Experience segment provides an integrated platform and set of applications and services that enable brands and businesses to create, manage, execute, measure, monetize and optimize customer experiences from analytics to commerce. This segment serves marketers, advertisers, agencies, publishers, merchandisers, merchants, web analysts, data scientists, developers and executives across the C-suite.
The Publishing and Advertising segment offers products and services, such as e-learning solutions, technical document publishing, web conferencing, document and forms platform, web application development and high-end printing, as well as Advertising Cloud offerings.

Adobe offers its products and services directly to enterprise customers through its sales force and local field offices, as well as to end users through app stores and through its website. It also distributes products and services through a network of distributors, value-added resellers, systems integrators, software vendors and developers, retailers and original equipment manufacturers.
[in-text-ad]
The Goldman Sachs price target for Adobe stock is $520, well above the $379.27consensus target of analysts. The final trade Friday came in at $287.94 a share, so hitting the Goldman Sachs target would be an 80% gain.

Datadog

This is a name investors may not be as familiar with, but it holds tremendous upside potential. Datadog Inc. (NASDAQ: DDOG) engages in the development of monitoring and analytics platforms for developers, information technology operations teams and business users. The company’s platform integrates and automates infrastructure monitoring, application performance monitoring and log management to provide real-time observability of its customers’ entire technology stack.

Datadog announced last year the extension of Network Performance Monitoring (NPM) to Windows. Datadog NPM now monitors the performance of network communications between applications running on Windows Server and Linux, providing seamless network visibility across cloud environments, on-premises data centers and operating systems.

Here’s why the analysts are so positive on the shares:

We believe that Datadog is a strategic infrastructure software provider with its end-to-end observability platform poised to benefit from IT departments shifting usage from multiple point solutions into an integrated suite. Datadog’s product-led and grass-roots GTM engine coupled with a best-in-class technology stack is resonating increasingly well with customers. Furthermore, with its upmarket motion gaining traction, we believe the company is ahead of many years of durable revenue growth.

Goldman Sachs has a $188 target price, and Datadog stock is on the firm’s Conviction List of top picks. The consensus target is $139.04, and the stocks closed at $75.69 on Friday. Hitting the Goldman Sachs target would be a 148% gain.

MongoDB

Many investors may not be aware of this software leader either. MongoDB Inc. (NASDAQ: MDB) provides general purpose database platforms worldwide.
The company offers:

• MongoDB Enterprise Advanced, a commercial database server for enterprise customers to run in the cloud, on-premise or in a hybrid environment
• MongoDB Atlas, a hosted multi-cloud database-as-a-service solution
• Community Server, a free-to-download version of its database, which includes the functionality that developers need to get started with MongoDB

[in-text-ad]
The company also provides professional services comprising consulting and training.

Revenue jumped in the second quarter, so analysts will be watching closely to see how the company performed in the third quarter. The company posted a remarkable 73% growth for Atlas, which churns out a stunning 64% of total revenue. The balance comes from enterprise-focused products and services.

The $380 Goldman Sachs price target compares with the $352.05 consensus target Friday’s $172.08 close for MongoDB stock. Hitting the Goldman Sachs target would be a 120% gain.

Salesforce

This is another high-profile software leader whose stock has been absolutely scorched this year. Salesforce Inc. (NYSE: CRM) provides customer relationship management technology that brings companies and customers together worldwide. Its Customer 360 platform empowers its customers to work together to deliver connected experiences for their customers.

The company’s service offerings include:

• Sales, to store data, monitor leads and progress, forecast opportunities, gain insights through analytics and relationship intelligence and deliver quotes, contracts and invoices
• Service, which enables companies to deliver trusted and highly personalized customer service and support at scale.

Its Service offerings also comprise flexible platform that enables companies of various sizes, locations and industries to build business apps to bring them closer to their customers with drag-and-drop tools; online learning platform that allows anyone to learn in-demand Salesforce skills; and Slack, a system of engagement. Further Service offerings include:

• Marketing, which enables companies to plan, personalize and optimize one-to-one customer marketing journeys
• Commerce, which empowers brands to unify the customer experience across mobile, web, social and store commerce points
• Tableau, an end-to-end analytics solution serving various enterprise use cases
• MuleSoft, an integration offering that allows its customers to unlock data across their enterprise

Salesforce provides its Service offerings for customers in financial services, health care and life sciences, manufacturing and other industries.

Salesforce stock has a $315 price objective at Goldman Sachs and is on the firm’s Conviction List. The consensus target is $222.41. Friday’s final trade at $142.22 represents 121% upside to the Goldman Sachs target.

This is yet another software giant that has been cut in half over the past year. ServiceNow Inc. (NYSE: NOW) provides enterprise cloud computing solutions that define, structure, consolidate, manage and automate services for enterprises worldwide.
[in-text-ad]
The company operates the Now platform for workflow automation, artificial intelligence, machine learning, robotic process automation, performance analytics, electronic service catalogs and portals, configuration management systems, data benchmarking, encryption, and collaboration and development tools.

ServiceNow also provides information technology (IT) service management applications; IT service management product suite for enterprise’s employees, customers and partners; IT business management product suite; IT operations management product that connects a customer’s physical and cloud-based IT infrastructure; IT Asset Management to automate IT asset life cycles; and security operations that connects with internal and third party. In addition, it offers governance, risk and compliance products to manage risk and resilience; human resources, legal and workplace service delivery products; safe workplace applications; customer service management products; and field service management applications.

Goldman Sachs has set its price objective for the Conviction List stock at $640. The consensus target is just $552.94. ServiceNow stock ended Friday’s session at $341.76 a share, so hitting the Goldman Sachs target would be an 87% gain.

Snowflake

Surprisingly, Warren Buffett has shares of this top software company in the Berkshire Hathaway portfolio. Snowflake Inc. (NYSE: SNOW) provides cloud-based data platforms in the United States and internationally. Its platform offers Data Cloud, an ecosystem that enables customers to consolidate data into a single source of truth to drive meaningful business insights, build data-driven applications and share data. The platform is used by various organizations of various sizes in a range of industries.

Economic worries and tightening budgets are accelerating a move to consumption pricing, which charges software customers based on how much they use a product rather than a recurring annual or multiyear subscription fee. The model that has been popularized by Snowflake is being adopted by a growing number of software makers.

The Goldman Sachs target price of $200 is less than the $220.51 consensus target on Snowflake stock. Still, there is 31% or so upside from the $152.38 close on Friday to the Goldman Sachs target.

Get Our Free Investment Newsletter

I have read, and agree to the Terms of Use

With earnings still in front of all these top companies, it makes sense to just consider partial positions now. The potential for the market to trade lower, combined with the fact that any earnings miss or poor forward guidance could cause any of these sector leaders to take a big hit.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.