Software stocks have had one heck of a year.
The IGV iShares North American Tech-Software Sector ETF is up more than 35% since the beginning of 2019, keeping on pace with the Nasdaq.
And according to Bank of America, software stocks should continue to head higher.
Analyst Kash Rangan wrote in a note that the software sector should see “moderating trade risk” in 2020, stabilizing macroeconomic conditions, and possibly higher IT spending.
Rangan says investors should look for companies that have “solid growth potential and margin expansion,” and said that he is zeroing in on those companies that “own their franchises” and dominate their markets.
At the top of Rangan’s list is Microsoft (NASDAQ: MSFT). The analyst just raised his price target on the stock to $200 – 26% higher than the current price.
According to Bank of America, Microsoft has several key growth drivers, including gaming and LinkedIn, and its Azure cloud computing service, which the bank said is set to make up more than 40% of the company’s annual growth in the coming years.
“Given that Azure has still not reached scale in terms of margins, it is still a meaningful driver for gross margins long term,” Rangan wrote in a note.
Rangan said Microsoft is “cloud-like in growth,” “legacy-like in margins,” and is “GAARP [growth at a reasonable price]-like in valuation.”
Up next, Rangan likes Adobe (NASDAQ: ADBE) and Salesforce (NYSE: CRM). The analyst said Adobe’s fundamentals look strong, and the company is poised to achieve 20% revenue growth in 2020. And as for Salesforce, Rangan said the company “will continue to emphasize sales capacity growth, R&D, and tactical acquisitions, which will position it solidly going into the next economic cycle upswing.”
And finally, Rangan is bullish on Splunk (NASDAQ: SPLK). The analyst said the big data and analytics company “continues to benefit from digital transformation spend in enterprises around the world.”
Rangan boosted his price target on Splunk to $200—31.6% higher than the current price—citing the company’s completed transition to cloud-based subscription software and perpetual licenses.
Of the four, analysts see the most upside for Salesforce shares, with the consensus price target on the stock indicating 17% upside over the next twelve months.