As the Nasdaq has slipped lower after hitting a new all-time high this time last month, Goldman Sachs says there’s opportunity to scoop up three software stocks.
In a note out this week, analyst Kash Rangan added Coupa Software (NASDAQ: COUP), Microsoft (NASDAQ: MSFT), and Salesforce (NYSE: CRM) to the firm’s Conviction Buy list, writing that each of the three names are “well positioned to capitalize on digital transformation spending, which we believe will outpace overall IT budgets for the foreseeable future.”
All three stocks are down over the last month amid the sell-off in tech, with Coupa down 22%, Microsoft down nearly 5%, and Salesforce shares down more than 10% over the last month.
Starting with Coupa, Rangan wrote that the company has a “large addressable market, high barriers to entry and long-term sustainable growth,” adding that it looks poised to continue “to benefit form the increasing pace of digital transformation in the office of the CFO. Also, we see it as an accelerating growth story in 2021, which sets up well for a steady cadence of positive revenue revisions, and therefore a re-rating of the multiple as well.”
Rangan has a $413 price target on Coupa shares, suggesting upside potential of more than 43%.
The analyst argues Microsoft, on the other hand, can benefit from multiple secular trends, including public cloud, software-as-a-service, digital transformation, artificial intelligence, and matching learning and business intelligence and analytics.
“We see a pathway for sustained double-digit topline growth alongside continued margin expansion,” Rangan wrote. “Moreover, our conversations point to Microsoft Azure increasingly short-listed as a strategic cloud vendor within large enterprise customers where we believe Microsoft is well positioned to continue to take market share.”
Morgan Stanley analyst Keith Weiss is also bullish on both Coupa and Microsoft, issuing Overweight ratings on both, and suggested in a note that investors aggressively buy growth-at-a-reasonable price names like the latter and companies with strong growth stories like the former.
“Even if the multiples appear high versus historical levels” for a stock like Coupa, Weiss wrote, “the improving spending environment should prove current consensus revenue forecasts conservative.”
As for Salesforce, Rangan says the stock’s recent weakness is a solid opportunity.
“With the stock trading at ~6.5x our calendar 2022 sales estimate, we believe investor sentiment continues to remain muted as investor concerns regarding the pace of margin expansion, organic growth of the core business, and potential dilution from further M&A continues to weigh on the stock.”
Given that Salesforce trades “at a sizable discount” to the other software names Rangan covers, he argues the stock’s risk/reward is “attractive at current levels.”
But beyond these three software picks, Weiss says conditions look positive for the sector as a whole.
“Increasing stability in interest rates going forward, shifting market dynamics from the recovery trade toward the expansion phase, and continued strong results in an improving spending environment all represent potential positive catalysts for the group,” Weiss concluded.