Software stocks have been outperforming the S&P 500 since last year, and analysts remain optimistic about the sector. However, within this positive sentiment, some companies are emerging as favorites among experts. Microsoft Corp., Salesforce Inc., and ServiceNow Inc. are among the top picks for investors, according to Evercore ISI analyst Kirk Materne.
Materne recently suggested that going against the grain might be a profitable strategy for investors. He analyzed the 25 largest public software companies by market value and observed that the median number of buy ratings for these stocks was 68%. It caught his attention that several of his buy-rated recommendations were below this median. Notably, Adobe Inc., Workday Inc., Snowflake Inc., and Oracle Corp. stood out from the pack.
While sentiment alone is not sufficient to drive change, Materne sees potential catalysts for each of these companies.
He believes that Adobe is an early winner in the field of generative artificial intelligence and expects more detailed information about the company's monetization objectives at an upcoming analyst day in late March. Furthermore, Materne points out that Adobe's decision to abandon its deal for Figma due to antitrust pushback could lead to an acceleration in buybacks.
As for Workday, Materne anticipates that it could become eligible for inclusion in the S&P 500 index following its fiscal fourth-quarter earnings report. He also expects solid results from the company.
In conclusion, while the software sector as a whole remains positive, experts like Materne have identified specific companies with the potential for successful growth. Adobe and Workday are among the companies worth watching closely in the coming months.
Don't miss: Microsoft earnings are on deck, and the whole software sector is riding on them.
Morgan Stanley's Top Software Pick: Workday (WDAY)
In the opinion of Morgan Stanley, the potential addition of Workday (WDAY) to the S&P 500 index could attract new investors. The firm also indicates that Workday's initial fiscal 2025 outlook already accounts for potential growth in revenue and margins, which might justify a higher valuation for the stock.
Snowflake (SNOW): A Revival in Beat-and-Raise Performance
Materne from Morgan Stanley finds it difficult to believe that Snowflake, despite trading at 16 times the estimated enterprise value to calendar 2025 sales, is undervalued when compared to its peers. After a year filled with fluctuations in consumption trends and several guidance adjustments, Snowflake seems poised to return to its previous pattern of exceeding expectations. Materne anticipates that as the year progresses and growth comparisons become more favorable, Snowflake's revenue will accelerate, leading to a shift in sentiment towards a more positive direction.
Oracle's (ORCL) Narrative: Unraveling the Moving Parts
Oracle has a complicated narrative with multiple elements at play. However, Materne believes that a key factor influencing the stock's upward movement is gaining a better understanding of the sustainable growth rate for Oracle Cloud Infrastructure (OCI). Despite the over-optimism surrounding Oracle's broader cloud opportunity when compared to Azure or AWS, Materne argues that the current negativity surrounding the stock is excessive.
Looking ahead to fiscal 2025, Materne envisions a more transparent storyline for Oracle, free from challenging comparisons to the fourth quarter of fiscal 2024.
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