The stock of Salesforce Inc. is getting a lot of love on Wall Street, with 43 of 49 analysts tracked by FactSet rating the shares a buy.
But Guggenheim analyst John DiFucci bucked the trend in a big way, kicking off coverage of the software giant on sale. The startup was one of four weak calls he made on large software stocks, along with Snowflake Inc. SNOW,
Workday Inc. WDAY,
and Okta Inc. OKTA,
also gets negative nods.
DiFucci is the only analyst tracked by FactSet to rate each Salesforce CRM,
Workday, and Okta on sale.
“We launched Software Sector coverage with a cautionary bias due to near-term macro weakness that will likely persist longer than most investors expect—and yes, even software can easily captain of macro forces,” DiFucci wrote in a note distributed to clients late Thursday, while acknowledging that he also appreciates the “long-term potential” of many stocks in the sector.
As for Salesforce, DiFucci said the company “shows attractive features of the software model, where revenue growth benefits from a massive renewal base,” but there is still he has some fears about the company.
Salesforce’s new annual contract value is “probably lower than most people realize,” he continued, while adding that the software company is “spending more to acquire new business” relative to its peers. . That trend has reflected itself in Salesforce’s operating margins, which are about 10 percentage points lower than those of the average large-capitalization peer, according to DiFucci.
“We estimate op. margin may expand more than investors expect, but this is negated by CRM’s continued pursuit of inorganic growth resulting in negative [free-cash flow] margin after accounting for M&A [merges and acquisitions],” he wrote. “We are skeptical of management’s ability to deliver good organic growth (even at lower rates)—it lowers the intrinsic value we assign to recurring CRM [revenue] stream.”
He titled his note to clients “Scrutinizing the Prodigal Son” and set a $150 price target on the stock, which closed Thursday at $186.73.
At Snowflake, DiFucci had concerns about what would happen to the company in a collapse. He expects the company’s fiscal 2023 revenue forecast to be met regardless of economic issues, though he doubts whether meeting that target alone will be “enough to sustain the share price.”
“In the event of a recession, the headwinds we believe SNOW saw in its F1Q23 results—like most other non-security enterprise software companies, according to our estimates—could have a significant impact of Snowflake’s business momentum,” he wrote, while setting a $125 price target. Snowflake stock ended Thursday’s session at $167.88.
See also: Snowflake stock falls after downgrade analyst considers ‘a tough call’
DiFucci is less enthusiastic about Workday’s ability to meet its fiscal 2023 revenue outlook, writing that the company faces a “tall hurdle” as it pursues 25% growth in annual contract value already in he thinks the company will need to achieve its revenue forecast.
“We see targets for sustained 20%+ subscription revenue growth and $10 billion in total revenue in FY26 also at risk,” he wrote, adding that he doesn’t believe Workday “will remain an organic high growth company (defined as 20 % growth for the foreseeable future) even 1-2 years ago.”
He established a $134 price target on shares of Workday, which closed Thursday at $166.08.
At Okta, DiFucci sees plenty of “underappreciated opportunities” ahead that the company can tap into, though he predicts “a couple of tough quarters near term.”
“Our estimates of the future market opportunity indicate that it will take some time for this large potential addressable market to be realizeas Okta opens up the Identity markets to corporate demand segments that did not previously have access to such solutions or did not have the level of sophistication (e.g., expertise, funding, etc.) required to consume them, ” he wrote. “Furthermore, we believe execution is key for Okta as it looks to reach several markets, some of which currently have no or no exposure.”
DiFucci has an $89 price target on Okta’s stock, which closed Thursday at $102.49.
He took somewhat more optimistic views on other stocks in the software universe, initiating coverage of Microsoft Corp. MSFT,
Cloudflare Inc. NET,
and ServiceNow Inc. NOW,
to neutral, while launching coverage of CrowdStrike Holdings Inc. CRWD,
Oracle Corp. ORCL,
Palo Alto Networks Inc. PANW,
Progress Software Corp. PRGS,
Smartsheet Inc. SMART,
Splunk Inc. SPLK,
and Zscaler Inc. ZS,
to purchase.
Read: Why Microsoft’s earnings guidance is more complicated than it seems
.