Morgan Stanley’s cloud services include ServiceNow, Palantir and DocuSign, but not Salesforce

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Morgan Stanley

Software research teams are generally optimistic about the prospects of software as a service, and they are cautious about it.

Salesforce.com,

The largest participant and pioneer in the industry.

The research company released several related research reports in this field on Thursday.

Analyst Keith Weiss downgraded his stock rating on Salesforce stock from “Exweight” to “Equal Weight” while maintaining the target stock price at $275.

Weiss asserted that, based on the company’s current growth rate, size, and market value, “it may need to pay more attention to free cash flow and earnings to further appreciate.” But he said, “the dynamic changes in the subscription model and management’s growth philosophy may lead to It has become so difficult in the short term.”

Salesforce has a market value of approximately $230 billion and has joined a software peer organization, including

Adobe

(ADBE),

intuition

(INTU), and

Microsoft

(MSFT), “All champions of the software industry, major franchisees and leaders in their respective fields will maintain market growth above the scale,” Weiss wrote.

But he pointed out that the valuations of these companies are mainly based on investors’ prices/income. Weiss wrote: “Given the current scale of Salesforce and the growth strategy of a large number of mergers and acquisitions, we think it may be necessary to pay more attention to EPS growth in order to make the stock price rise substantially.”

The analyst wrote that he believes that market opportunities have created nearly $40 billion in revenue for Salesforce (about twice the current level), but “lack of confidence in substantially increasing profit margins prevents us from reducing the current $275 The price target pushes up, balances risk/reward at the current level, and pushes us to rate the stock as “same weight.”

At the same time, Weiss’s colleague Stan Zlotsky published a wide range of reports on the software-as-a-service field. Although stock valuations have risen, there are many recommendations. He wrote: “Despite the macro uncertainty, we still weigh the strong unit economy of software against multiples of historical highs,”. “As efficient business models meet the growing demand before 2021, SaaS still has a lot to mention.”

He writes that in the entire SaaS space, “because of the potential unit economic improvement being affected by the pandemic, this year’s enterprise value appreciation has surpassed the number of subscribers.” This is a messy statement that inventory becomes more expensive.

Having said that, he believes that “the opportunities in a selected set of names reflect above-average unit economics and rebuttable valuations.” His choices include

frame

(frame),

DocuSign

(DOCU),

Current service

(just now),

Proof point

(PFPT),

Palandir Technology

(PLTR),

Team viewer

(TMVWY),

Veeva system

(VEEV), and

ZoomInfo Technologies

(day).

Zlotsky believes that in the current environment, investors are flocking to SaaS stocks for four reasons: seeking growth and strong long-term positioning; improving the economics and profitability of the unit; the defensive nature of sticky recurring income; and US politics And low exposure to geopolitical tensions.

He wrote: “Ultimately, some of the best long-term growth stories are in SaaS. This pandemic has accelerated the transition to the cloud and the adoption of many different types of software to help companies in the distributed/virtual world. Work better.” “As the pandemic recovery progresses, we believe that the SaaS name we want to emphasize is most likely to take advantage of growing demand trends and a spring-loaded unit economy to generate strong returns. [free cash flows], And support valuation. “

Here is a brief commentary of all the stocks Zlotsky recommends:

• Box: “We see opportunities for stocks to rise, especially considering the improvement of unit economic conditions and low expectations for future growth.”

• DocuSign: “We still believe that the company’s sustained growth and strong unit economic value are underestimated.”

• ServiceNow: Upgrade from equal weight to overweight on Thursday. “By 2021, the priority of workflow automation will be higher and higher. Coupled with continued investment in 2020, with the expanding market opportunities now covering IT, customer service and HR delivery workflows, ServiceNow is expected to Achieve a sustained income growth of more than 25% in the coming year.

• Proof: “We continue to forecast ~30% free cash flow growth in the next 5 years… Assets are undervalued.”

• Palantir: “In view of the rapid growth of profit margins and the prospect of accelerated growth in the future, attractive risks/rewards.”

• TeamViewer: “Leading the market in remote access, support and control.”

• Veeva: “Software combines first-class unit economics and sustained revenue growth, and is a unique asset in software.”

• ZoomInfo: “Some of the most effective unit economics in the entire SaaS group.”

In early trading on Thursday, Salesforce fell. ServiceNow rose 3%. Palantir, which has performed strongly since election day, is down 5%, and most other stocks cited by Morgan Stanley are up 1% to 2%.

Write to Eric J.Savitz, email: [email protected]