Guggenheim launched coverage of Salesforce with a Sell rating.
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What’s next for enterprise software stocks? That depends which ones you pick.
Guggenheim Partners analyst John DiFucci launched coverage of the group late Thursday, with some thoughts on where to place bets in the sector. DiFucci is new to Guggenheim, but a familiar name on the Street—at various times, he’s covered the software sector for Jefferies, J.P Morgan, Oppenheimer, and a couple of place that have since disappeared—Bear Stearns and Donaldson, Lufkin & Jenrette.
DiFucci’s calls will provide investors with considerable room for debate.
He set Sell ratings on Okta (ticker: OKTA), Workday ( WDAY
), Salesforce (CRM), and Snowflake (SNOW).
DiFucci has Buy ratings on Oracle (ORCL), Palo Alto Networks (PANW), CrowdStrike (CRWD), Splunk (SPLK), Zscaler (ZS), and Progress Software (PRGS).
The analyst launched three stocks with Neutral ratings: Microsoft (MSFT), Cloudflare (NET), with an $82 target, and ServiceNow (NOW).
Here’s a rundown on his calls, starting with the Sell ratings.
Okta: While he sees “a large, expanding and underappreciated opportunity ahead” for the identity-management software company, he sees “a couple of difficult quarters near term.” His $89 target price is 16% below Thursday’s closing level.
Workday: DiFucci says it will be “challenging” for Workday, which sells enterprise HR and finance software, to meet fiscal year 2023 revenue guidance, given the impact of a softer economy on the company’s business. His target price of $134 implies about 22% downside from Thursday’s close.
Salesforce: The analyst says organic growth is slower at the iconic cloud software company than many investors realize, and adds that Salesforce spends “materially more” than peers to capture new business. He’s also wary of the company’s historic tendency to spend free cash flow on acquisitions. DiFucci sees risk to Salesforce’s goal of reaching $50 billion in annual sales by fiscal 2026. He sees about 20% downside in the stock, setting a target of $150.
Snowflake: DiFucci says that Snowflake is “a standout in terms of its technology and its frictionless business model,” and has become “the preferred vendor for cloud data warehousing.” But he is “cautious in the face of a potential recession,” and does not think the company is immune, contrary to the company’s view. His $125 target implies 28% downside.
Here’s a look at his Buy-rated picks:
Oracle: DiFucci is bullish on Oracle’s transition to the cloud, and sees the company sustaining high single-digit revenue growth and double-digit profit growth. He notes that a modest acceleration in the database business alone could drive the company to double-digit profit gains—and he also notes that the company is making progress in competing against Amazon .
com, Microsoft and Google in cloud computing services. His $107 target implies a potential 38% gain.
Palo Alto Networks: The analyst says the security software company will easily hit current year guidance. “The company is well positioned to benefit from the shift to Zero Trust, and a likely vendor consolidation trend in the security market,” he writes. His $625 target suggests 20% upside for the stock.
CrowdStrike: Th endpoint security company is “a well-run software company that exemplifies the attractive characteristics of the industry,” he writes. “We expect it to convince any skeptics that a security company can represent enduring value.” His $270 target suggests a potential gain of 34%.
Splunk: He says that estimates “are simply too low” for Splunk, which makes software used to monitor IT systems. His $160 target price points to a potential return of nearly 40%.
Zscaler: “Ultimately, we believe Zscaler will maintain its leadership in cloud-based network security,” he writes. His $233 target suggests a potential return of about 29%.
Progress Software: DiFucci says the company is using cash flow from its core OpenEdge software development platform to reinvest in accretive acquisitions. “Management has proven it has an ability to execute in a disciplined manner,” the analyst writes. His $60 target suggests 25% upside.
Lastly, here’s his take on the three Neutral rated stocks.
Microsoft: While he sees midteens precent growth in revenue and free cash flow for the software giant, he also sees “continued declines” in Windows which he thinks isn’t embedded in current Street estimates. “At current levels, we see a balanced risk/reward profile and a stock that is fairly valued,” he writes, setting a target of $292, 1% above Thursday’s close.
Cloudflare: While he likes the growth story at Cloudflare, DiFucci doesn’t see much upside given a valuation that looks high relative to peers. “To price the stock much higher …seems to introduce more risk than we’re comfortable with,” he writes. His $82 target implies just 4% potential growth from here.
ServiceNow: While ServiceNow is “a very well run company,” the analyst says the workflow management software company will likely miss its long-term subscription revenue goals, especially if there is a prolonged recession. His $510 target price is slightly below Thursday’s closing level.
Amid a broad rally in technology shares, almost all of the stocks mentioned here are trading higher Friday, led by Workday, up 5.5%, and Progress Software, up 3.5%. Three stocks in the group are lower, with Snowflake off 1.2%, ServiceNow 0.7% lower and Okta down less than 1%.
Write to Eric J. Savitz at eric.savitz@barrons.com
Source: finance.yahoo.com