Author: Anirudha Bhagat

Enterprise software stocks have made a remarkable comeback year to date (YTD) after a massive sell-off in 2022 on recession concerns, inflationary pressure, increased oil prices and higher interest rates. Enterprise software stocks, such as Salesforce CRM, Atlassian TEAM and Adobe ADBE, have either overcome last year’s loss or are on the verge of the same.

YTD, Salesforce, Atlassian and Adobe stocks have rallied 73%, 39.1% and 53%, respectively. In 2022, CRM, TEAM and ADBE stocks have declined 48.1%, 66.6% and 41%, respectively.

The aforementioned stocks have also outperformed the broader equity market. Major U.S. stock market indexes, Nasdaq Composite, The Dow Jones Industrial Average and the S&P 500, have risen 34.9%, 4.1% and 17.3%, respectively, YTD.

Additionally, Salesforce and Adobe stocks have handily surpassed Technology Select Sector SPDR’s XLK, the most important component of the broad market index, YTD gain of 41.4%. However, Atlassian’s YTD increase is slightly lower than XLK’s gain.

What’s Driving This Rally?

With persistent inflationary pressure and softening demand, the fears of recession have not subsided yet. However, enterprise software companies have been focusing on cost-cutting measures to improve profitability and stay afloat amid these turbulent times. The strategies have boosted investors’ confidence, thereby boosting their share prices.

Furthermore, the success of OpenAI’s ChatGPT has demonstrated the AI technology’s potential to improve operations in almost every industry. Though AI has been around for years, the meteoric rise of OpenAI’s ChatGPT has captivated the world’s attention on the power of generative AI to augment human capability, suggesting that the AI boom may just get started.

Generative AI is a type of AI technology that can produce various types of content, including text, imagery, audio and synthetic data. The long-term growth prospect attached to this technology has led to a sharp rise in the share prices of AI-related technology and solutions providing mega-cap companies.

Invest in Enterprise Software Stocks

Considering the probable new demand for enterprise software integrated with generative AI features and a possible improvement in profitability due to cost-cutting initiatives, we believe that there is still significant upward potential left in CRM, TEAM and ADBE stocks. Therefore, investors should invest in these stocks that are fundamentally strong and can sustain market jitters and ensure solid portfolio returns.

We ran the Zacks Stock Screener to identify the aforementioned enterprise software stocks that have a favorable combination of a Growth Score of A or B and a Zacks Rank #1 (Strong Buy) or #2 (Buy).

The Growth Style Score condenses all the essential metrics from a company’s financial statements to get a true sense of the quality and sustainability of its growth. Additionally, per Zacks’ proprietary methodology, stocks with a combination of a Zacks Rank #1 or #2 and a Growth Score of A or B offer solid investment opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

The abovementioned enterprise software stocks look promising based on their encouraging growth prospects, Zacks Rank and Growth Score. Let’s discuss the tech stocks in detail:

Salesforce has been benefiting from the strong adoption of its cloud-based products and solutions as customers are undergoing a major digital transformation amid the ongoing hybrid work environment. Its ability to provide an integrated solution for customers’ business problems is the key driver.

Salesforce is currently focusing on incorporating generative AI tools across its products as it looks to keep its business ahead of rivals. The company forayed into the generative AI space with the launch of Einstein GPT in March 2023. Upping its ante in the space, last month, Salesforce launched its AI Cloud service, which the company claims is a one-stop AI-powered solution for enterprises looking to enhance productivity.

Furthermore, the company is cutting costs and raising product prices to improve profitability. To cut costs, Salesforce announced a broader restructuring plan in early January 2023. Under the plan, it intends to lay off approximately 10% of its total global workforce, exit real estate and shut down office spaces in certain markets.

Additionally, last week, Salesforce announced that it would raise the prices of certain products, which we believe is likely to boost the company’s profitability. CRM plans to hike prices across its core products — Sales Cloud, Service Cloud, Marketing Cloud, Industries and Tableau — by an average 9%, effective from August 2023.

Currently, Salesforce sports a Zacks Rank #1 and has a Growth Score of A. The Zacks Consensus Estimate for Salesforce’s fiscal 2024 earnings has been revised upward by 33 cents to $7.44 per share over the past 60 days, implying a year-over-year increase of approximately 42%.

Atlassian is benefiting from the rising demand for remote working tools amid the hybrid work trend and accelerated digital transformation. An improvement in product quality and performance, multiple product launches, transparent pricing and a unique sales strategy is an upside. The expansion of its product portfolio through acquisitions is expected to accelerate growth momentum. Also, integration with leading applications like Dropbox and Adobe, along with partnerships, is likely to expand its paying-user base.

Atlassian’s latest focus on adding AI features to some of its collaboration software is likely to drive the top line over the long run. In April 2023, the company collaborated with OpenAI to enhance the capabilities of its Confluence, Jira Service Management and other programs with generative AI features.

Additionally, the company’s announcement of reducing its total workforce by 5% or 500 employees in March 2023 shows its sincere focus on improving profitability. The company cleared that the layoff is not a financially-driven reduction rather it is done to reallocate resources to concentrate on growth divisions.

Currently, Atlassian carries a Zacks Rank #2 and has a Growth Score of B. The Zacks Consensus Estimate for TEAM’s fiscal 2024 earnings has been revised upward by a penny to $2.11 per share over the past 60 days, suggesting a year-over-year increase of approximately 21.2%.

Adobe has aggressively expanded its footprint in the generative AI space through partnerships and new solutions. Through its partnership with NVIDIA, Adobe is developing a generation of advanced generative AI models, with a focus on deep integration into applications. Adobe and Google also partnered to bring Firefly to Bard. Adobe Firefly is the most differentiated generative AI service that generates commercially viable, professional quality content.

Adobe has expanded its offerings powered by Adobe Sensei GenAI. It has unveiled Generative Fill in Photoshop, bringing Adobe Firefly generative AI capabilities directly into design workflows.

On the cost-cutting front, Adobe laid off about 100 employees in December 2022. Though it is a very small number compared with massive layoffs announced by other tech giants, the move reflects that Adobe has kept its operating expenses under check.

The stock carries a Zacks Rank #2 and a Growth Score of B at present. The Zacks Consensus Estimate for ADBE’s fiscal 2023 earnings is pegged at $15.70 per share, up by 26 cents over the past 30 days. This indicates year-over-year growth of 14.5%.

Salesforce Inc. (CRM): Free Stock Analysis Report

Adobe Inc. (ADBE): Free Stock Analysis Report

Technology Select Sector SPDR ETF (XLK): ETF Research Reports

Atlassian Corporation PLC (TEAM): Free Stock Analysis Report

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