Software stocks participated in the broader market rally this year, in fact outperforming the broader market by a meaty margin. Does that mean valuations in the space are stretched out?
An analyst at Bank of America delved into key themes that are likely to play out in the software sector in 2020 and presented a list of 10 stocks that are his top picks for the upcoming year.
Strong IT Spending Environment
Despite continued fears of an economic slowdown, the IT spending environment is likely to remain strong, analyst Kash Rangan said, citing BofA's channel checks and surveys.
The analyst said his focus in on companies that have solid growth potential, margin expansion opportunity and good track record of the management team.
Rangan said he is increasingly selective on the sector, especially as macro economists call for a ‘'late stage economic cycle with a tilt towards value and concerns about a tech/trade war.'"
Additionally, companies, which were avoided by investors in 2018/2019 due to dilutive M&A activity, fearing lower margins for the year, are good for taking a look at, Rangan wrote in the note.
"….. we believe these companies are poised to reap the benefits of their acquisitions (less negative impact from deferred revenue write down, product/go to market synergies) on their anniversaries in 2020," he added.
Five Themes Impacting Software Companies In 2020
BofA outlined the following as key themes an investor in the software space should focus on:
Companies on the cusp of realizing the benefits of dilutive acquisitions made in 2019
- Inflection in digital transformation of enterprise
- The rise of DevOps
- Software transforming CEO's office
- Artificial intelligence going mainstream
BofA Top Software Picks
- Microsoft Corporation (NASDAQ: MSFT) – Buy/Price Target Raised from $162 to $200
- Adobe Inc (NASDAQ: ADBE) – Buy/Price Target $350
- Salesforce.com, inc. (NYSE: CRM) - Buy/Price Target Raised from $200 to $215
- Workday Inc (NASDAQ: WDAY) – Buy/ Price Target $260
- Splunk Inc (NASDAQ: SPLK) Buy/Price Target Raised from $170 to $200
- RingCentral Inc (NYSE: RNG) – Buy/ Price Target $198
- Coupa Software Inc (NASDAQ: COUP) - Buy/ Price Target $185
- HubSpot Inc (NYSE: HUBS) - Buy/ Price Target $190
- Avalara Inc (NYSE: AVLR) - Buy/ Price Target $100
- Twilio Inc (NYSE: TWLO) - Buy/ Price Target $138