Technology

3 UBS Favorite Software Stocks to Buy That Report Earnings Next Week

Lee Jackson

Published: November 12, 2015 10:45 am

Last Updated: January 13, 2020 5:15 pm

With a back-and-forth grinding market, it’s always difficult to spot sector trends. Every time it seems like there is a clear winner, a sell-off resets the table and technology investors especially are forced to start over. One thing is for sure, in the software segment of technology, some 2016 winners seem to be pretty clear, and a new research report from UBS is pretty clear about which way investors should look.

UBS concedes that 2015 has been difficult for the software makers, but things rebounded nicely in October, up 8%. The firm says the best plan for 2016 is to stay with the biggest platform-type players that carry reasonable multiple valuations. Three top companies stand out and are grabbing more than their fair share of corporate information technology spending, thanks to their platform attracting strategic commitments. All are rated Buy at UBS and all report earnings next week.

Salesforce

This company posted outstanding earnings for the second quarter, and it is one of Wall Street’s favorite large cap growth ideas now. Salesforce.com Inc. (NYSE: CRM) has been the momentum stock trader’s dream over the past few years. Many on Wall Street feel that while the stock trades mostly in line with its fast organic software-as-a-service (SaaS) peer group, which many see as having the largest growth rate in 2015, the company should trade at a premium to the group.

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The company posted year-over-year billings growth way above estimates and operating margins expanded by 1.7%. Wall Street analysts see substantial billings growth going forward, and many have already raised their fiscal 2016 estimates on both revenues and earnings.

Its growing portfolio of enterprise-class solutions have not only enhanced the brand, but is helping to achieve access into bigger companies. And the company’s new analytics products are factored into many 2016 estimates and could provide upside. The company is expected to report third-quarter earnings next week.

Salesforce’s Platform business now generates $1 billion of annual subscription and support revenues, equal to about 16% of Salesforce’s total revenue mix. The Platform segment includes Force.com (enterprise-grade, hosted in Salesforce’s data centers) and Heroku (hosted on AWS, more of an elastic cloud, supports most new programming languages).

While many think that the company’s growth guidance could be conservative, Salesforce is constantly apart of Wall Street takeover chatter, and that tends to keep short sellers at a distance. UBS sees the valuation as reasonable and thinks the company comes in with a slight earnings beat, as comparisons remain tough.

The UBS price target for the stock is $89, and the Thomson/First Call consensus target is at $82.07. Shares closed Wednesday at $78.71.

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Intuit

This company has been on a roll this year and hits all the metrics in the sector. Intuit Inc. (NASDAQ: INTU) loves income tax time as its TurboTax product is one of the most widely used, and sales are expected to be very solid once again this year. It is also well-known for the QuickBooks line of accounting software, which is used by firms big and small. Intuit announced earlier this year it is launching QuickBooks Online Self-Employed, a new product that makes it easy for the rapidly expanding population of freelancers and independent contractors to handle small business accounting. The company estimates 43% of workers will be self-employed by 2020.

Intuit has served small businesses and accountants with QuickBooks for more than 20 years. It was an early innovator in cloud accounting when it first launched QuickBooks Online in 2001. The company recently announced that QuickBooks Online has more than a million paying subscribers, cementing its market leadership as small businesses shift to the cloud.

UBS noted that the third-quarter numbers are seasonally lighter and not as relevant. The firm does feel that quarter-to-quarter commentary on progress for QuickBooks Online and positioning for the upcoming tax season could be favorable for this defensive technology stock. Intuit also is expected to be reporting earnings next week.

Intuit investors receive a 1.2% dividend. UBS has a big $114 price objective. The consensus price target is $99.60. Shares closed Wednesday at $99.39.

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Palo Alto Networks

This has been another momentum trader’s dream, and it may have more investors looking its way after the FireEye implosion. Palo Alto Networks Inc. (NASDAQ: PANW) is helping to lead a new era in cybersecurity by protecting thousands of enterprise, government and service provider networks from cyber threats, and it boasted staggering year-over-year billing growth. Unlike fragmented legacy products, its security platform safely enables business operations and delivers protection based on what matters most in today’s dynamic computing environments: applications, users and content.

The company’s security platform has new features that recently were introduced that help security professionals overcome the distractions and time spent on problems caused by the overwhelming volume of alerts and manual processes associated with operating many discrete security products, and instead expand breach prevention capabilities and boost operational efficiency.

Palo Alto Networks blew away fiscal fourth-quarter earnings and will report first quarter results on November 23. The best thing for investors is that the past quarter’s numbers were against already tough comparisons, and with the demand for security continuing almost unabated, the company could be poised for years of incredible growth. It continues to be ranked the highest with the Wildfire product, which has been the favorite in the advanced persistent threat (APT) space among the value added resellers who carry and sell the product. Toss in 20% upside in billing for the quarter, and the story is a killer going forward.

Lastly, other analysts on Wall Street have made it clear that the feedback they got from the professionals at recent security conferences was the most bullish on Palo Alto Networks, and the company is gaining real traction with larger data centers firewalls.

UBS has a $202 price target, near the consensus of $201.63. The stock closed trading Wednesday at $155.78.

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These top pick stocks are really only suitable for very aggressive growth accounts. With that in mind, they all have the potential to trade much higher and all appear set to have an outstanding 2016.