Technology

Merrill Lynch Out With Top Software Stock Picks for 2018

Lee Jackson

Published: December 20, 2017 8:40 am

Last Updated: January 12, 2020 5:16 am

Technology as a whole has been on fire in 2017, and with numerous tailwinds for next year, there is every reason to believe that the strength in the sector can continue. While the semiconductor arena was the hottest, software was right in the mix, and with the need for large-scale analytics, big data, cloud computing and much more, there is every reason to think that the top companies can drive big earnings in 2018.

In new research report from Kash Rangan, the outstanding software analyst at Merrill Lynch, he and his team introduce a new 2018 acronym for their software coverage universe: CLaMR or cloud growth and mean reversion. Within this specter, they are looking to identify software companies in which the narrative may be changing.

These 10 stocks are the top picks, and all are rated Buy at Merrill Lynch.

Adobe Systems

This high-profile old-school software company has posted outstanding earnings. Adobe Systems Inc. (NASDAQ: ADBE) operates in three segments. The Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote and monetize their digital content. The other segments are Digital Marketing and Print and Publishing.

Top Wall Street analysts see the company benefiting from artificial intelligence, predictive analytics, automation bots, speech recognition and natural language processing and image recognition. Some on Wall Street see earnings per share increasing a solid 30% or more for 2018.

The Merrill Lynch price target for the shares is $220, and the Wall Street consensus target is $196.77. The stock closed Tuesday at $174.97 per share.

Salesforce.com

This top company reported solid fiscal 2018 second-quarter results as billings drastically improved, and it is on the Merrill Lynch US 1 list. 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.

Merrill Lynch has a $125 price target, while the consensus price objective is $121.76. Shares closed trading on Tuesday at $104.26.

Oracle

This top software stock was hit hard recently and is offering a very good entry point. 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.

Shareholders receive a 1.59% dividend. Merrill Lynch has set its price target at $62. The consensus target is $55.83, and shares closed Tuesday at $47.82.

SAP

This top technology company has a history of making very selective accretive acquisitions. SAP S.E. (NYSE: SAP) provides application and analytics software and software-related services for enterprises worldwide. It offers solutions covering various lines of businesses, including asset management, commerce, finance, human resources, manufacturing, marketing, sales, service, sourcing and procurement, supply chain and sustainability, as well as research and development and engineering. And it provides enterprise application software to various industries, including consumer, discrete manufacturing, energy and natural resources, financial services, public services and services.

The company also offers SAP Business Suite, as well as software-as-a-service, such as SAP SuccessFactors solutions; and SAP cloud-based solutions, such as temporary workforce sourcing, procuring and managing external workforce and travel and business travel expense management systems. Additionally, the company provides analytic solutions, such as trusted data discovery and agile visualization, advanced analytics, and corporate performance management solutions; and support, custom software development, consulting, training, messaging and payment services.

Shareholders receive a 0.85% dividend. The $129 Merrill Lynch price target compares with the $125.64 consensus estimate. Shares ended Tuesday at $115.20 apiece.

VMware

This still may be one of the best stocks to own, and it has been on a tear this year. VMware Inc. (NYSE: VMW) provides virtualization infrastructure solutions in the United States and internationally. Its virtualization infrastructure solutions include a suite of products designed to deliver a software-defined data center run on industry-standard desktop computers and servers, and support a range of operating system and application environments, as well as networking and storage infrastructures. Its solutions enable organizations to aggregate multiple servers, storage infrastructure and networks together into shared pools of capacity.

The Merrill Lynch price target is $148. The consensus target is $132.32, and shares closed Tuesday at $128.14.

Workday

This top company also looks to benefit from increased IT spending and has had a very solid year for investors. Workday Inc. (NYSE: WDAY) is a leading provider of enterprise cloud applications for finance and human resources. It delivers financial management, human capital management and analytics applications designed for the world’s largest companies, educational institutions and government agencies.

In the fall, Workday hosted a very upbeat and positive analysts day, and many feel that the company is transforming into a platform story, customer growth is reaching an inflection point and the module attach rate is very strong. Long-term operating margins are being increased, as many analysts feel that big picture of the company’s operating leverage is not fully reflected in the stock price.

Merrill Lynch has a $134 price objective, well above consensus target of $108.49. Shares closed on Tuesday at $102.93.

HubSpot

This stock has had a solid run since selling off late last year. HubSpot Inc. (NYSE: HUBS) is a cloud-based provider of inbound marketing tools such as website content management, blogging tools, email campaign, search engine optimization, social media monitoring and management, customer relationship management and others for small businesses and midsize companies.

The company’s tools provide a single console for marketing professionals to generate new customer leads, convert leads to customers and customers to repeat customers.

The $102 Merrill Lynch price target compares with the consensus target of $92.47. The stock closed Tuesday at $92.80.

Tableau Software

This was a red-hot stock that has also been a rumored takeover target for some time. Tableau Software Inc. (NASDAQ: DATA) provides business analytics software products in the United States, Canada and elsewhere. It 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 Merrill Lynch price target is $90, but the consensus target was last seen at $76.19. The stock closed on Tuesday at $70.68.

Splunk

This remains one of the top picks on Wall Street. Splunk Inc. (NASDAQ: SPLK) provides a software platform for collecting, storing, indexing, searching and analyzing machine generated data, such as log files and configuration files, which are prevalent in every type of IT system, device and application.

Splunk technology is potentially applicable and disruptive in several market segments, including IT operations, security and compliance, and business intelligence. These market segments are collectively worth $28 billion today.

The massive $95 Merrill Lynch price target is higher than the $85.97 consensus price objective and the most recent close at $84.21 a share.

RingCentral

This is a smaller cap name that Merrill Lynch is positive on for 2018. RingCentral Inc. (NYSE: RNG) offers a cloud-based solution for business communications that replaces legacy and expensive on-premise communications systems. It is delivered as an application that follows the user regardless of device (office phone, smartphone, desktop, tablet). Features include voice, text, fax, audio conferencing and integration with document and customer relationship management systems.

Merrill Lynch has noted that over the past year several factors have come together to propel the company’s business model. RingCentral is seeing enterprise traction, channel is driving enterprise deals and the Avaya install base is an opportunity.

The Merrill Lynch price target is $57. The consensus target is $49.57, and shares closed Tuesday at $47.70.

These 10 top software plays for 2018 range from large cap giants to nimble small-cap up-and-comers. All these top picks make good sense for aggressive growth accounts with a higher risk tolerance level.