© Reuters ServiceNow Macquarie’s Top Picks as it Begins Coverage of Software Stocks
By Sam Boughedda
Macquarie Research initiated coverage on several software stocks in a note on Wednesday, telling investors it’s “still the best house on the block.”
The firm announced that its top pick is ServiceNow (NYSE: ), while it has Outperform ratings on nCino (NASDAQ: ), HubSpot (NYSE: ), and most controversially, Salesforce (NYSE: ). Meanwhile, its top cyber pick is CrowdStrike Holdings Inc. (NASDAQ:), and they remain neutral on infrastructure “due to continued IT budget constraints.”
“We’re taking what we think is a more constructive view of application software than the Street, because we think we’re facing less significant downside than in previous months because the business models of software company remains superior to most with recurring revenues, strong balance sheets, and endless demand for digital transformation, automation, data integrity and a single source of data truth. Our biggest concern is margin compression because on return to work/in-person and travel costs, but also due to inflation and rising electricity prices . With macro pressures on growth, OpEx implementation is top of mind and where we think companies are can be more rewarding, which is reflected in our ratings,” explained Macquarie.
The firm believes the software sector has contracted significantly in terms of the leading valuation metrics used by investors.
However, while they see that there is “clearly still some potential downside,” the firm thinks that this is more “limited now due to the health of the balance sheets of software companies, which are cash-rich, as well as the increase of its group. mix of recurring revenues from 74% to 86% (per IDC) over the past five years, creating more defensible business models.”