Like every other industry, the numbers for software companies are being lowered due to the ongoing COVID-19 issues across the globe, and while consumers and businesses continue to need the applications the enterprise software companies provide, buying shares in this environment could still be dangerous.

While acknowledging the challenges the spread of coronavirus has had on the software sector, the analysts at Jefferies remain positive on some of the top companies that have strong recurring revenue. Toss in the fact that many of the top companies have been hit incredibly hard already, investors with nerves of steel may want to consider scaling in some small capital to the companies Jefferies continues to remain bullish on.

The Jefferies analysts have five top companies that stand out, as the multiples applied to all of them have dropped substantially during the recent bout of selling and volatility. All remain Buy-rated at Jefferies as well.

Adobe Systems

Shares of this high-profile old-school software company have backed up in price and are offering the best entry point in quite some time. Adobe Systems Inc. (NASDAQ: ADBE) operates in three segments: Digital Media, Digital Marketing and Print and Publishing. 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.

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 analysts anticipate that earnings may increase a solid 30% or more in the coming year.

Wednesday, the software company reported earnings per share for the most recent quarter that topped the consensus estimate. Revenue of $2.99 billion also exceeded analysts’ expectations for the quarter. Adobe posted a net margin of 26.4% and a solid return on equity of 31.5% as well.

Jefferies has a $385 price target on the shares, while the Wall Street consensus target is $360.46. Adobe Systems stock closed on Wednesday at $315.23, down over 5% on the day.

Intuit

This company hits all the metrics in the technology sector for accounting needs. Intuit Inc. (NASDAQ: INTU) is a provider of business and financial management solutions for small and medium-sized businesses, financial institutions, consumers and accounting professionals.

Products and services include TurboTax, QuickBooks, Quicken, small business financial management and payroll processing, personal finance and tax preparation and filing and online banking services through its Digital Insight acquisition. Intuit also offers products on a software as a service (SaaS) platform across all its business divisions.

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

Over 40% of small businesses are using either Quickbooks Online or Quickbooks Desktops, while 35% are using Excel or manual paper accounting. The Jefferies team remains very positive on the shares and noted that they think the company is one of the firm’s most defensive names, with subscription-based small business accounting and predictable tax business.

Investors receive a 0.79% dividend. Jefferies lowered its $330 target price to $325. The consensus price objective is $297.88, and Intuit stock closed well below those levels at $261.12, down just over 3% on Wednesday.

Microsoft

This is perhaps the top legacy software and cloud technology stock, and it has a massive $133.8 billion sitting on the balance sheet. Microsoft Inc. (NASDAQ: MSFT) manufactures, licenses and supports a wide range of software products. It is also considered one of the best companies to work for.

Microsoft has transformed its business model from a component-driven model (PC, server) to one driven by the need for cloud capacity. The cloud was big in the 2019 earnings reports and will remain a growing part of the software giant’s earnings profile.

Many Wall Street analysts agree that Microsoft has become a clear number two in the public or hyper-scale cloud infrastructure market with Azure, which is the company’s cloud computing platform offerings, and which continues growing at triple-digit levels. Some have flagged Azure as the biggest rival to Amazon’s AWS service. Other analysts maintain that Microsoft is discounting Azure for large enterprises, such that Azure may be cheaper than AWS for larger users.

Jefferies had this to say when the company reported results last month:

Microsoft reported strong fiscal second quarter results across the board with Azure accelerating to an impressive 64% year over year growth rate vs. 63% last quarter. Total revenue growth was 15% and management guided double digit revenue growth and 2% of operating margin expansion in fiscal 2020. We continue to see strong visibility into double digit percentage revenue growth, supported by multiple drivers (Intelligent Cloud, Productivity & Business Processes) and secular trends for the foreseeable future.

Shareholders receive a 1.5% dividend. The $195 Jefferies price target was lowered to $190, and the consensus target was last seen at $194.19. Microsoft stock retreated 4.5% on Wednesday to close at $153.63.

RingCentral

This smaller-cap company remains a potential takeover target and is a member of the Jefferies Franchise Picks list. 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.

For some time, Jefferies has believed the company has multiple catalysts, including continued traction with mid/enterprise customers, increased partner traction, international expansion and continued dislocation in the industry from legacy PBX/UC vendors.

Last year, Avaya entered into a strategic partnership with RingCentral in which it will introduce a new unified communications as a service (UCaaS) solution. Under the agreement, RingCentral will contribute $500 million to the deal and will be Avaya’s exclusive provider of UCaaS solutions.

The Jefferies price target is $245, in line with the $245.61 consensus figure. Wednesday’s $199.34 closing share price came after a 6.8% fall on the day.

ServiceNow

This stock had an incredible 2019 and remains a top pick at Jefferies. ServiceNow Inc. (NYSE: NOW) develops and sells a hosted, subscription-based suite of services designed to automate various IT department functions, such as help desk, operations management and change/release management.

The company also sells a number of applications that automate various self-service related applications outside of the IT department, such as HR onboarding, facilities requests and governance, risk and compliance.

The company on Wednesday said it released a new version of its cloud software with artificial intelligence technology designed to fix practical problems, such as helping users reset forgotten passwords. For example, if an employee needs to reset a password to access human resources software, the person can talk to a virtual assistant in the ServiceNow system that can ask a few questions and reset the password automatically. The system uses a technology called natural language processing to understand the request.

Jefferies has set a $360 price objective. The consensus price target is $360.94, and ServiceNow stock closed most recently at $290.63. It retreated over 7% on Wednesday.

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The market volatility is a clear sign that any trading bottom is not close to being put in. With that caveat noted, aggressive accounts may want to slowly scale in some capital to start building positions in these five top companies, which all should still be standing long after the COVID-19 threat has been removed from the headlines.

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