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This has been a big year for software stocks, but there may well be further gains ahead. BofA Global Securities analyst Brad Sills has some ideas on how to play the trend.
The software analyst on Wednesday resumed the firm’s coverage of five well known enterprise-software companies, setting Buy ratings on Microsoft (MSFT), Salesforce (CRM), ServiceNow (NOW), and Workday (WDAY). He rated Oracle (ORCL) at Neutral.
Here’s a brief summary of his calls, roughly in order of his level of enthusiasm.
Salesforce: Sills put a $275 price target on the cloud-software pioneer’s shares, which have come under some selling pressure since news emerged that the company plans to pay $27.7 billion for Slack Technologies (WORK). He named the stock a “top pick,” saying the company looks good in four key areas, which he calls the four Ms: market, competitive moat, management strength, and margin potential. “We believe a long runway still exists for Salesforce to continue growing organically at 17%+ in the coming years,” he said. The Slack deal, meanwhile, offers a cross-selling opportunity for Salesforce and will allow for complementary efforts in areas such as sales contract design and go- to-market planning.
ServiceNow: The company is another top pick, with a price target of $650. He writes that the company also screens wells on his four Ms rubric. Sills said that in recent calls with more than a dozen global system integrators, he found “strong pipeline builds” for software “to manage [a] more disrupted and distributed employee and customer base.”
Microsoft: Sills set a $256 price target on the software giant, saying the company can sustain low double-digit growth for the next three to five years, driven by continued adoption of the Azure public cloud and adoption of cloud-based applications like Office 365. He also expects a boost from the company’s games business, with the rollout of the new Xbox just under way. Microsoft can catch up to Amazon Web Services in the cloud-services business over the next five or six years, he said.
Workday: Sills set a target of $265 for the stock price, for a potential gain of about 20%. He said the company can reaccelerate to growth in the 19% to 20% range, and noted that “channel feedback also suggests that despite COVID deployment delays, pipeline builds remain solid for both new [human capital management] and [financial software] customer adds and expansion deals.”
Oracle: Sills’ target for the stock price is $68, about 10% above the current level. His concern is that while the company is seeing early signs of cloud growth, it is more than offset by softness in its legacy on-premise software business. “We estimate that roughly 69% of our fiscal year 2021 revenue estimate is generated from legacy on premise license/maintenance and hardware revenue, with 0% growth,” he wrote. “While prudent operating expense management and share buybacks are likely to generate stable mid/high single digit EPS growth in the coming years, we see few real catalysts for the shares.”
Write to Eric J. Savitz at [email protected]
