Although technology stocks have hit skids this year, Goldman Sachs analysts see some opportunities in the software sector.
“While the likelihood of a recession is low, we believe that software business models are more insulated from severe economic shocks than previous collapses,” they wrote in a commentary.
That’s because of the “reliance on recurring revenue and built-in cost agility that can support operating leverage,” they said.
“This combination could make the sector a more defensive game than in the past, as we saw at the beginning of the pandemic.”
The tech stock selloff has many software companies apparently trading at a substantial discount to their true value, analysts said.
“Our intrinsic value analysis along with the analysis of long -term growth and margin potential leads us to focus on growth companies with revenues … as defendants.”
That included included Microsoft (MSFT) – Get a Microsoft Corporation Report, Salesforce (CRM) – Get salesforce.com, inc. Report, Service Today (NOW) – Get a ServiceNow, Inc. Report, Adobe (ADBE) – Get Adobe Inc. Report, Intuit (INTU) – Get Intuit Inc. Report at Working day (WDAY) – Get a Workday, Inc. Class A Report.
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As for Microsoft, this is “probably one of the most resilient revenue stories in the technology industry and in various sectors,” analysts said.
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“The combination of continued operating leverage, as its cloud business reaches an approximately $ 90 billion run-rate, and sustainable earnings-per-share growth should result in potentially doubling revenues per share. from fiscal 2022 to fiscal 2027. “
In addition, “Microsoft is an excellent provider of capital, as evidenced by a successful track record of acquisitions, dividends and share purchases,” analysts said. “[That] arguing for a compelling overall comeback story. “
Turning to Salesforce, it should enjoy improved revenue, despite the deteriorating macroeconomic environment, analysts said. That’s what happened in the down cycles of 2008-2009 and 2020.
“Salesforce should simultaneously see higher margins due to cost mitigation and see continued revenue growth generated by previous bookings,” analysts said.
“One of the first categories that will benefit from improving the appetite for strategic investments in enterprise information technology is the front office category in which CRM performs.”
Looking at ServiceNow, “the company has a very unique combination of a core IT service management and operations business, which accounts for 70% to 75% of revenue,” analysts said.
“The core can be argued as a defensive product category, especially if IT departments are gaining increasing influence under potential restrictions on wallet conditions.”
The rest of the company’s business, which focuses on employee, customer and creator workflows, (custom app development) can be viewed as offensive share gainer, analysts say.
“As businesses move their data center assets to the public cloud over the long term, we believe ServiceNow’s value proposition will only increase to its customers, due to the physical separation of IT assets from the owners of business. “
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