J.P. Morgan software analyst Sterling Auty downgraded Adobe and a dozen other stocks, as part of a reassessment of the group heading into 2022.
Vladyslav Yushynov/Dreamstime.com Co
J.P. Morgan software analyst Sterling Auty reduced his ratings on Adobe and a dozen other stocks, as part of a reassessment of the group heading into 2022. His wide range of calls have triggered sharp selloffs in Adobe and peers on Tuesday.
The analyst also cut his price targets for another eight stocks, while lifting his ratings on five.
Auty wrote in a lengthy research note that growth rates remain the number-one determinant of software valuations. “This has been consistent since 2000 and brings into focus whether growth rates can sustain or moderate at a tolerable level to keep valuations propped up,” he writes. “We saw clearly what can happen when growth slows abruptly with the 42% one-day hit to DocuSign (ticker: DOCU).”
He also notes that the number of publicly traded software stocks has soared, with 68 initial public offerings and special-purpose acquisition company, or SPAC, deals boosting the number of software companies he monitors to 263.
“A challenging part is the trading patterns we saw in a number of IPOs this year that advanced out of the gate but then faded, as we witnessed investors using these recent IPOs as funding sources to buy the next IPO,” he writes. “We think this is creating a bit of an orphaned stock phenomenon that, for the right investor, can mean picking up quality assets at a discount to where they were trading shortly post IPO.”
Upgrades: Auty raised his ratings on Avalara ( AVLR
), CrowdStrike (ticker: CRWD
), Model N ( MODN
), and SS&C Technologies (SSNC) to Overweight from Neutral.
For Avalara, which provides tax-compliance software, he says that “given the defensive nature of its solutions and potential for either better growth or margins, we think now is the time to get more positive on the name.” For CrowdStrike, a security-software company, he says a recent stock-price decline “provides opportunity for top-line growth to provide performance upside (rather than multiple expansion).”
For Model N, which sells revenue-management software for life sciences and tech companies, he sees promise in the company’s business model shift to the cloud. For SS&C, a provider of software to the health care and financial services segments, he says that “M&A strategy will lead to significant synergies if some deals are able to close.” Auty also upped PROS Holdings (PRO), which sells software for sales teams, to Neutral from Underweight.
Downgrades: This is a longer list. For Adobe (ADBE), Amdocs (DOX), Blucora (BCOR), Cadence Design Systems (CDNS), PTC (PTC), and SolarWinds (SWI), he cuts his rating to Neutral from Overweight. For Akamai Technologies ( AKAM
), CCC Intelligent Solutions Holdings (CCCS), Cloudflare (NET), Datadog (DDOG), Doximity ( DOCS
), Sapiens ( SPNS), and Zscaler (ZS), Auty goes to Underweight from Neutral. Most of those reflect concerns about valuation—in Adobe’s case, for instance, he notes that the stock is within 10% of his price target at $680.
Auty also trimmed price targets on Alkami Technology (ALKT), EngageSmart ( ESMT
), EverCommerce (EVCM), GitLab ( GTLB
), LegalZoom (LZ), LivePerson (LPSN), Tufin Software ( TUFN
), and Udemy (UDMY), mostly to reflect the impact of higher interest rates.
Auty also writes that his three favorite stocks for 2022—these are reiterations of already bullish calls—including videoconferencing company Zoom Video Communications (ZM), Procore ( PCOR
), which provides software for construction management, and Intapp (INTA), a provider of cloud-based software for the financial-services segment.
Adobe stock is down 6.6% to $614.76. Note that the company reports earnings after the close of trading on Thursday.
Other movers among the companies cited in Auty’s flurry of research notes and rating changes include: Zscaler, down 10.3%; Doximity, off 6.6%; Datadog, down 8.6%; Cloudflare, off 7.5%, CCC Intelligent Solutions, off 6%; Cadence, down 5%; and SolarWinds, off 4%.
Write to Eric J. Savitz at [email protected]
