Investors are back to hating software stocks for the most part.
The iShares Broadened Software Technology Sector ETF is down 10% in the past month, underperforming the S&P 500, while several core ETFs – such as Adobe (-15%) and Salesforce (-19%) – have decreased much more.
Analysts have blamed the renewed selling pressure on economic fears leading to a slowdown in sales growth for the once-hot space.
“Macroeconomic concerns remain the topic du jour as investors look for clues and try to discern which companies and categories are more or less cyclically exposed,” Deutsche Bank analyst Brad Zelnick said in a note to clients after the meeting with the leaders of 45. software companies at a Deutsche Bank conference.
That said, Zelnick noted that while the software sell-off may continue in the near term, there are a few names that investors should start looking at as buys before demand improves in 2023.
Here were the main takeaways from Zelnick’s memo:
Short-term installation for the software industry
“For the most part, management teams characterized the demand backdrop as unchanged from last quarter (ie increased deal scrutiny and deal slippage) and we expect this message to remain throughout the heavy September season, which could to create some optimism in the state of the demand environment,” Zelnick wrote.
However, the analyst added, “we argue that these observations carry risk given how busy Software quarters tend to be, especially for large deals that can make or break a quarter. Sequential changes in demand are often surprises at the end of quarter for software companies. which is a dynamic that we saw play out in Q2 and expect to likely continue into Q3.”
Purchase #1: Snowflake
Price target: $190
Bullish Case: +11%
“Based on our conversation with CFO Mike Scarpelli, we leave the conference feeling better that the fiscal issues in the first quarter were more isolated and that the secular headwinds are only strengthening, with a buying opportunity big enough for many huge winners (and no substantial change in competitive dynamics),” Zelnick explained. “The extent to which Snowflake proactively helps customers drive workload optimization/price has impressed us and seemingly yields larger, more loyal customers over time. We also appreciate the feedback that an increasingly large business base helps to more accurately prediction of the consumption-based revenue model.”
Market #2: Zoominfo
Price target: $75
Bullish Case: +81%
“Based on our conversations with CFO Cameron Hyzer, companies are not looking to cut back on ‘foot-on-the-road’ salespeople, but are trying to be more efficient and leverage their sales and marketing investments,” the analyst wrote. “Zoominfo’s high-quality sales data, quick ROI and targeted marketing/talent solutions play well in this context, along with shorter sales cycles that management believes allows them to better shape their messaging in the current environment. “
Zelnick added: “We came away more confident in Zoominfo’s secular leadership, less concerned about its software/VC exposure (under 40% and under 10%, respectively) and comfortable with continued outperformance against a conservative setup guidance that incorporates further macroeconomic deterioration for the remainder of the year.”
Market #3: Salesforce
Price target: $255
Bullish case: +67%
“As our leading GARP [growth at a reasonable price] software choice, our view of Salesforce is less about the company’s presence at our conference, but more based on the broader field of thinking that comes out of the event,” Zelnick said. negative results after the fiscal second quarter with the stock -14% against the IGV software index -7%.”
“We believe the model is prudently turned down for the second half of the financial year,” he continued, “with our rough math suggesting that guidance suggests around a third of the NNACV target is down, possibly indicating a year-over-year decline . to new businesses, as happened during the Great Financial Crisis in 2008/2009″.
Beyond the company’s latest earnings, Zelnick noted that he sees “the disclosure of a $10 billion share repurchase authorization for the first time as a milestone, underscoring the company’s commitment to shareholders and of course an expression of the value it sees in its stock.” maintaining a 20.4% non-GAAP operating margin for FY23 despite a $800 million decline in FY revenue (now $30.9-31.0 billion) was a strong demonstration of fiscal discipline that we believe we can build on in the era of Amy Weaver (CFO from February 2021).”
Brian Sozzi is editor-in-chief and Anchor on Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and up LinkedIn.
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