Software shares stumbled this year, in line with other technology stocks. The S&P Software & Services Select Industry Index has fallen 31% so far in 2022.
But hope is not lost, says Wells Fargo analyst Michael Turrin.
“Rising rates, inflation, [the war in Ukraine]and restrictions on labor markets have contributed to increasing concerns around a more difficult spending environment and potential recession in late 2022/2023, ”he wrote in a commentary.
And that’s putting kibosh in software stocks.
However, “the basics have remained noticeably resilient to this day,” Turrin said.
“Outside of the effects of foreign-exchange, most companies in our scope actually continued to perform well through earnings in the first quarter, with little impact from the geopolitical conflict and the tighter environment. -hire. “
Standoff
There is a “chance between investor sentiment/appreciation levels and management comment/reported results [that’s] likely to extend further until 2022, as macro concerns have shown little signs of easing, ”Turrin said.
Also, software stocks tend to respond to those concerns later than other sectors, he said.
“Appreciation levels are now back to decade-long averages, compared to 18 months ago, when they seemed to need a decade’s worth of forward. [earnings] assumptions, ”Turrin said.
“We expect the macro to dictate near-term performance trends, presenting some admitted challenges to our primarily focused outlook on the sector.”
But, “ultimately, we hope the software will once again prove worthy of a premium in the market, driving an eventual return to performance,” Turrin said.
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His best prediction is that that will happen in earnings reports in the second half of the year. It will be “shorter if macro concerns subside, longer if the recession scenario takes on steam,” Turrin said.
He recommends that investors consider “businesses with strong platform positioning, balanced growth profiles, and management teams with proven track records,” preferably led by founders.
Turrin put three stocks in the basket of “large-cap platforms that are likely to prove more stable”:
1. Microsoft (MSFT) – Get a Microsoft Corporation Report. This is “the best way to play the broad secular trend toward software,” Turrin said. “Microsoft’s platform positioning is especially useful in the current environment,” he said. “And management has proven to be good at taking the right strategic steps in a rapidly changing backdrop.” Turrin rates the stock as overweight.
2. Service Today (NOW) – Get a ServiceNow, Inc. Report. It is “among the platforms with the best position and well -balanced financial profiles in the software, delivering a balance of high growth and free cash flow,” Turrin said. He rates the stock as overweight.
3. Working day (WDAY) – Get a Class A Report by Workday, Inc.. It has “a series of significant growth drivers in action and … a favorable setup in fiscal 2023 due to the improving financial and defensive profile … positioning of this platform,” it said Turrin. He rates the stock as overweight.
Turrin put three stocks in the basket of “balanced growth companies ready to rebound”:
1. HubSpot (HUBS) – Get HubSpot, Inc. Report. “We see a lot of ongoing runway for HubSpot, due to still high new customer activity, record retention rates, an expanding range of products and a steady growth of the market,” he said. Turrin. He rates the stock as overweight
2. based in Australia Atlassian (TEAM) – Get Atlassian Corp. Plc Class A Report. “The cloud transition represents a significant value creation event for this well -positioned and long -term profitable company,” Turrin said. It has the potential for annual 30%-plus growth and 30%-plus free-cash-flow margin, he said. He rates the stock as overweight.
3. ZoomInfo Technologies (ZI) – Get ZoomInfo Technologies Inc. Report. “It has achieved an exceptional balance of nearly 50% organic revenue growth and 35% -plus free-cash-flow margin,” Turrin said. “We see a long, well -balanced runway ahead.”
The author of this story owns parts of Microsoft.
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