There’s a fair bit of love for software stocks on Wall Street, after the category has trounced the S&P 500 since the start of last year.
But while analysts remain generally positive on the sector, unsurprisingly, they have their favorites: Think Microsoft Corp.
MSFT,
Salesforce Inc.
CRM,
and ServiceNow Inc.
NOW,
Evercore ISI analyst Kirk Materne recently wondered if “going against the grain” could help investors, given “largely bullish” software-sector sentiment.
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He took a look at the 25 largest public software companies by market value and noted that the median amount of buy ratings for those stocks was 68%. Then he examined which of his buy-rated names sat below the median. Adobe Inc.
ADBE,
Workday Inc.
WDAY,
Snowflake Inc.
SNOW,
and Oracle Corp.
ORCL,
stood out.
“Obviously, sentiment does not change without a catalyst,” he wrote, but he sees potential drivers for each.
Adobe, in his view, is an “early winner” from the craze around generative artificial intelligence, and Wall Street will find out at an analyst day in late March more granular detail about the company’s monetization objectives there.
Materne also flagged that Adobe could accelerate buybacks now that the company abandoned its deal for Figma in the face of antitrust pushback.
Workday, meanwhile, could become eligible for S&P 500
SPX
inclusion following its fiscal fourth-quarter earnings report, and Materne anticipates that those results will be “solid.”
“We…believe any sense that WDAY could ultimately be added to the S&P 500 would bring new investors into the name,” he wrote. Plus, he thinks the company’s initial fiscal 2025 outlook bakes in the potential for top-line and margin upside, which could help the stock fetch a higher multiple.
Read: Morgan Stanley’s new top software pick is a familiar winner
Looking elsewhere, Materne commented that it was “hard to believe” that a stock trading at 16 times enterprise value to estimated calendar 2025 sales “might be underloved on a relative basis,” but that’s the case with Snowflake “after a year with a lot of back and forth regarding consumption trends and a couple of guidance resets.”
Now, though, he thinks Snowflake is ready to get back to its old beat-and-raise ways. “While we expect that bears will consider any guidance for FY25 of 28-30% as ‘not good enough,’ we believe that as the year progresses and the growth compares get easier, SNOW could see revenue accelerate and that would flip the narrative in a more positive direction,” he wrote.
Finally, there’s Oracle, which has “a lot of moving parts” to its narrative. But, according to Materne, “the key to the stock moving higher is simply to getting a better gauge on what is a sustainable growth rate for OCI,” or Oracle Cloud Infrastructure.
“In our view, the narrative swung way too positively in early CY24 as Oracle is not an ‘all-purpose’ cloud and its opportunity in cloud infrastructure is narrower vs. Azure/AWS,” he acknowledged. “But at this
point, we believe the negativity is also a bit overdone.”
What could flip the script? Materne sees the possibility of a much “cleaner” story come fiscal 2025, once Oracle moves past tough comparisons for the fourth quarter of fiscal 2024.
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