Investors have returned to hate software stocks for the most part.
IShares’ Expanded Tech-Software Sector ETF fell 10% in the last month, significantly underperforming the S&P 500, while several key ETF components – most notably Adobe (-15%) and Salesforce (-19%) – were down a lot more.
Analysts blame the renewed selling pressure on economic fears that are driving a slowdown in sales growth for the once hot space.
“Macroeconomic concerns remain the topic of the day as investors look for clues and try to distinguish companies and categories that are more or less cyclically exposed,” said Brad Zelnick, an analyst at Deutsche Bank, in a note to clients after the conference. ‘meeting with leaders of 45 software companies at a Deutsche Bank conference.
That said, Zelnick noted that while the software sell-off may persist in the near term, there are a few names that investors should start considering as purchases before demand improves in 2023.
Here are the main takeaways from Zelnick’s note:
Short-term setup for the software industry
“For the most part, management teams have characterized the demand scenario as unchanged since the last quarter out (i.e. more control of deals and slippage of deals) and we expect this message to persist through a heavy conference season. September, which could create some optimism across the state of the demand environment, ”Zelnick wrote.
However, the analyst added, “we argue that these observations are risky, given the way that quarters of software loaded into the backend tend to be, especially for big deals that can make or break a quarter. demand often comes as end-of-quarter surprises for software companies, which is a dynamic we’ve seen unfolding in Q2 and we expect it will likely persist into Q3. “
Buy n. 1: snowflake
Target price: $ 190
Presumed upside: + 11%
“Based on our conversation with CFO Mike Scarpelli, we walk out of the conference feeling better that Q1 tax issues were more isolated and that the century-old twenties are only getting stronger, with a broad enough market opportunity for bigger winners ( and no significant changes in competitive dynamics), “Zelnick explained. “The extent to which Snowflake proactively helps customers drive workload optimization / value has impressed us and apparently produces larger and more loyal customers over time. We also appreciate comments that a growing business base broad helps to predict its consumption-based revenue model more accurately. “
Buy n. 2: Zoominfo
Target price: $ 75
Presumed upside: + 81%
“Based on our conversations with CFO Cameron Hyzer, companies are not trying to cut down on ‘down the street’ salespeople, but are trying to be more efficient and increase impact with their sales and marketing investments.” , wrote the analyst. “Zoominfo’s high-quality sales data, rapid return on investment, and targeted marketing / talent solutions are playing well in this context, along with shorter sales cycles that management believes allow them to better tailor theirs. messages to the current environment “.
Zelnick added: “We moved away more confident in Zoominfo’s secular leadership, less concerned about its software / VC exposure (less than 40% and less than 10% respectively) and comfortable with the continued potential to outperform a conservative driving configuration incorporating further macro deterioration for the remainder of the year. “
Buy n. 3: Salesforce
Target price: $ 255
Presumed upside: + 67%
“Like our best GARP [growth at a reasonable price] software choice, our outlook on Salesforce is no less about the company’s attendance at our conference, but more based on our broader industry thinking moving away from the event, “said Zelnick. Post-fiscal negative second quarter results with the stock -14% against the IGV Software index -7%. “
“We believe the model has been cautiously devalued for the second half of the fiscal year,” he continued, “with our rough calculations suggesting that the guide implies a reduction of about a third of its NNACV target, likely implying a year-on-year decline. after year in new business which is what happened during the Great Financial Crisis in 2008/2009. “
Beyond the company’s latest earnings, Zelnick noted that he sees “the presentation of a first $ 10 billion share buyback authorization as a watershed moment, underscoring the company’s commitment to shareholders and, of course, a ‘ expression of the value it sees in its shares. In addition, maintain the non-GAAP operating margin line of 20.4% for fiscal year 23, despite the reduction in fiscal year revenue of $ 800 million (now $ 30.9 -31.0 billion) was a strong demonstration of fiscal discipline that we believe we can count on in the era of Amy Weaver (CFO since February 2021). “
Brian Sozzi is a general editor and again on Yahoo Finance. Follow Sozzi on Twitter @Brian Sozzi and go LinkedIn.
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