Technology

Merrill Lynch's 5 Top Tech Server and Software Picks for the Rest of 2016

Lee Jackson

Published: September 15, 2016 10:10 am

Last Updated: January 13, 2020 3:32 am

While the recent upheaval in the markets could last into next week and up through the Federal Reserve meeting, one thing remains pretty clear. Even if rates are raised now and in December, the federal funds rate would still be barely at 1%. That is a way below the historical average and hardly one that would crimp commerce. One sector that should continue to hold up well the rest of the year is technology, and one firm we cover here at 24/7 Wall St. has some top picks for the rest of 2016.

A recent Merrill Lynch research report highlighted five top technology picks for the rest of the year, and all of them have a big cloud presence. While better suited for aggressive growth accounts, all these companies have solid and stable franchises and look to be leaders well into the future. All of course, are rated Buy at Merrill Lynch.

Cornerstone OnDemand

Some may be less familiar with this company, but Merrill Lynch is very positive on it. Cornerstone OnDemand Inc. (NASDAQ: CSOD) develops and sells software that automates the processes involving employee recruiting, performance management, compensation management and succession planning. Its offerings are sold under the software-as-a-service (SaaS) model, hosted by Cornerstone and sold on a subscription basis.

The analysts cite the company’s position as the learning and performance leader in the large enterprise arena. They also see improving sales productivity and think there is upside to current booking estimates. That upside should lead to solid earnings and margin gains.

The Merrill Lynch price objective for the stock is $52, while the Wall Street consensus target is $48.88. Shares closed most recently at $44.09.

Oracle

This top software stock has traded sideways since the spring and looks to be putting in a nice cup and handle formation. Oracle Corp. (NYSE: ORCL) develops, manufactures, markets, sells, hosts and supports database and middleware software, application software, cloud infrastructure, hardware systems and related services worldwide.

The company licenses its Oracle Database software to customers, which is designed to enable reliable and secure storage, retrieval and manipulation of various forms of data. Its Oracle Fusion Middleware software aims to build, deploy, secure, access and integrate business applications, as well as automate their business processes.

With shares trading at 15 times estimated 2016 earnings, and with a solid free cash flow yield, many analysts also feel that Oracle’s 12C database cycle starts to contribute during calendar 2016, and the stock could very well be poised for what they term a breakout year. After recent investors meetings, some analysts raised fiscal year 2017 cloud margins to 66% from 63% and earnings per share to $2.80. Merrill Lynch also believes that the software giant may be on the verge of a multiyear database product cycle.

Investors receive a 1.5% dividend. Merrill Lynch has a $48 price target, and the consensus price objective is $44.29. Shares closed Wednesday at $40.25.

Salesforce.com

Though this top company reported choppy second-quarter numbers, the stock took a hit. Salesforce.com Inc. (NYSE: CRM) provides enterprise cloud computing solutions, with a focus on customer relationship management to various businesses and industries worldwide. It offers enterprise cloud computing applications and platform services, including Sales Cloud that 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.

Despite the earnings and billings miss, the analysts remain positive and said this in a recent report:

Our take is seasonality may be shifting heavily towards the fourth quarter after defying size, producing consistent execution for 3 years. The company has recovered from billings misses, raising questions about maturity, execution, competition, with panache in the past.

The Merrill Lynch price target is $100. The consensus target is $94.40. The stock closed at $73.82 a share.

ServiceNow

This could be among the fastest growing of the Merrill Lynch Buy-rated stocks. ServiceNow Inc. (NYSE: NOW) expects to have 50% of the Global 2000 customers by 2020, adding 15 to 20 each quarter. ServiceNow is the enterprise IT cloud company with a service 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.

Customers use the firm’s service model to define, structure and automate the flow of work, removing dependencies on email and spreadsheets to transform the delivery and management of services for the enterprise. Service Now enables service management for every department in the enterprise, including IT, human resources, facilities, field service and more.

The $86 Merrill Lynch price target is about the same as the consensus target of $86.04. The shares closed Wednesday at $72.56.

Tableau Software

This red-hot stock took a huge hit earlier this year when it reported a poor quarter, but it has rallied back smartly. Tableau Software Inc. (NASDAQ: DATA) provides business analytics software products in the United States, Canada and elsewhere. The company offers Tableau Desktop, a self-service analytics environment that empowers people to access and analyze data independently, and Tableau Server and Tableau Public, a free cloud-based platform for analyzing and sharing public data. The company’s business intelligence platform with data management and scalability has the security to foster the sharing of data.

The company announced last year the launch of its Shanghai operations as the company expands in China to better serve customers and partners locally. With 1.3 billion people, a quickly expanding urban economy and exponential rates of Internet and smartphone penetration, China generates an immense amount of data annually. Tableau can help bring that data to life for corporations seeking to assimilate the huge data input.

The company recently had a big change at the chief executive officer and chief development officer slots and the analyst said this:

Adam Selipsky, Vice President of Amazon Web Services (AWS) will succeed Mr. Chabot as CEO. Andrew Beers, a senior development executive with Tableau since 2004, will replace Chris Stolte as Chief Development Officer. We view these leadership changes as a positive. Mr. Selipsky brings experience scaling a multi-billion dollar organization.

The Merrill Lynch price objective is posted at $75. The consensus target is $64.58, and shares closed trading Wednesday at $55.38.

All five of these companies have a solid foothold in their respective product silos. Again, they are volatile and more vulnerable to an earnings miss or headline issues than more conservative tech companies. That aside, they also offer superior upside potential.