Analyst Sees 5 Software Stocks Dominating Future Sales and Sector Growth

By Lee Jackson Published Oct 21, 10:20AM EDT

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If one thing has been painfully clear to investors this earnings season, it is that some of the biggest old-school technology software names are struggling. IBM reported terrible earnings Monday and both SAP and Oracle have also reported weak results. At UBS, the analysts feel the investing path is clear: stick with the names providing solutions for the newest software and industry needs. The UBS team feels that cloud, security and big data companies meet the needs driving current and future growth, and investors need to focus on the stocks that cater to those areas.

In a new research report, the UBS software team lists five top stocks for investors to focus on for software growth and stock performance. All are buy-rated at UBS.

Microsoft Corp. (NASDAQ: MSFT) is a top large cap value technology stock rated Outperform at UBS that offers investors solid growth and income. While posting strong earnings for the second quarter, Microsoft also announced huge layoffs of up to 17,000 employees as a result of the Nokia handset purchase this summer, and it continues to wring costs out of the system. The company reports earnings on Thursday and expectations are solid. The UBS team sees Microsoft continuing to evolve away from its core Office suite of products and focusing on multiple areas of growth and new products.

Microsoft investors are paid a respectable 2.85% dividend. The UBS price target for the stock is $48, and the Thomson/First Call consensus target is $48.31. Microsoft closed Monday at $44.08 a share.

ALSO READ: Recent Market Weakness Puts 4 Top Tech Stocks On Sale

Cornerstone OnDemand Inc. (NASDAQ: CSOD) provides talent management on the cloud via recruiting, learning, performance and outreach. The company announced earlier this month that it has signed a definitive agreement to acquire Evolv, a privately held big data/analytics company offering a machine learning and data science platform.

UBS has a $60 price target, while the consensus target is $51.85. The stock closed on Monday at $34.30.

Tableau Software Inc. (NYSE: DATA) is a company that has taken a huge dive since hitting 52-week highs of over $100 back in February. This sell-off comes despite solid earnings reported in the first two quarters of the year. Tableau is one of the market leaders when it comes to big data and is a global leader in rapid-fire, easy-to-use business intelligence software. UBS sees the company as perhaps the most compelling way for investors to play big data for the mass market, where continued execution momentum and conservative guidance should provide sustained upside and material upward estimate revisions.

The UBS price objective is listed at $80, and the consensus target is higher at $86.67. Shares closed Monday at $71.56.

FireEye Inc. (NASDAQ: FEYE) was absolutely crushed in the recent sell-off and investors now have the opportunity to add a top software security stock at a very reasonable entry point. FireEye recently announced the new release of FireEye Email Threat Prevention Cloud that adds the traditional email security features of anti-spam and antivirus protection to its advanced threat detection capabilities. The company is a favorite for product resellers focused on advanced persistent threat protection for clients.

UBS has a $40 price target and the consensus target is set at $42.35. The stock closed on Monday at $29.60. FireEye traded to almost $100 earlier this year.

ServiceNow Inc. (NYSE: NOW) wraps up the list of software stocks that can dominate sales in coming years. This enterprise IT cloud company’s service is used to create a single system of record for IT and automate manual tasks, standardize processes and consolidate legacy systems. Using the company’s extensible platform, customers can create custom applications and evolve the IT service model to service domains inside and outside the enterprise. The UBS team is very bullish on the stock and thinks billings growth for the second half of 2014 could be as much as 50%.

The UBS price target is $72, while the consensus target stands at $72.20. The stocks closed on Monday at $59.28.

ALSO READ: 3 Top Cloud and Communication Stocks With Big Upside

The world has changed, and except for Microsoft, some of the bigger players in the industry have had a hard time adapting. While the game is hardly over for those companies, the sleeker and more nimble players are grabbing market share based on new business demands and needs.

About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.