The year 2013 was a one of accelerating growth for most software companies, and the software analysts at Merrill Lynch expect 2014 to continue to show strong growth. However, unlike 2013, when performance was skewed towards cloud and big data companies, they expect 2014 outperformance in the software sector to be driven more by mean reversion. The bottom line for the top stocks this year is that actual earnings growth will trump valuation expansion. If that indeed proves to be the case, then investors may have a great 2014.
With multiple themes providing the path for the top names in 2014, the Merrill Lynch team does not need to take a lot of chances. Legacy vendors are shifting their products to cloud and subscription-based business models, and some others are becoming more reliant on their cloud segments business. The top companies have jumped ahead and embraced these changes. Those are the stocks the Merrill Lynch teams sees as poised to succeed and prosper this year.
Here are the top six software stocks to buy for 2014 from Merrill Lynch.
Citrix Systems Inc. (NASDAQ: CTXS) is a top-rated stock to buy at almost every Wall Street firm that we cover. IBM’s software unit missed badly in the third quarter, and Citrix is poised to grab business in this arena. While IBM’s Financial Services revenue declines also worsened slightly during the fourth quarter, it had the best relative performance as compared to the other verticals. The Merrill Lynch analysts believe this also bodes well for Citrix, which generates about 20% of its revenue from the segment. The Merrill Lynch price target for this top-rated stock is $78, and the Thomson/First Call consensus target is $71.66. Citrix closed Thursday at $59.67.
Fleetmatics Group PLC (NYSE: FLTX) is one of the few names in the Merrill Lynch top picks that may be less familiar to investors. The company provides software-as-a-service fleet management solutions for small and medium-sized businesses worldwide. It offers Web-based and mobile application solutions that provide fleet operators with visibility into vehicle location, fuel usage, speed and mileage, and other insights into their mobile workforce under the Fleetmatics or SageQuest names. The company blew out earnings in the third quarter last year, and it looks poised to do the same for the fourth quarter. The Merrill Lynch price objective is $55, and the consensus is at $49. Fleetmatics closed Thursday at $37.51.
Salesforce.com Inc. (NYSE: CRM) is another top name on the list. The company’s 2013 portfolio expansion included the acquisition of ExactTarget, which rounds out its marketing automation capability, and the introduction of Salesforce1, a leap forward for developing applications that run natively on mobile devices. Merrill Lynch has a $64 price target for the stock, and the consensus is lower at $60.21. Salesforce.com closed Thursday at $60.08.
TIBCO Software Inc. (NASDAQ: TIBX) is a top stock to buy at Merrill Lynch. Near term, the Merrill Lynch analysts think the company should see a multi-quarter increase in sales productivity where they believe upward estimate revisions are likely. With fourth-quarter revenue climbing 6% year over year and 10% sequentially, TIBCO continues to do an adequate job of balancing growth expectations with meaningful share gains. What’s more, TIBCO is doing this in an environment where Wall Street is ready to applaud low single-digit revenue performances. The Merrill Lynch price target for the stock is posted at $30. The consensus price target for the stock is $26.30. TIBCO closed Thursday at $21.95.
Oracle Corp. (NYSE: ORCL) has sputtered over the past year, giving investors a prime entry point to the stock. The technology giant is making a push into cloud computing, application virtualization and software-defined networking. Application virtualization and software-defined networking should be key areas of revenue growth going forward. Shareholders are paid a 1.3% dividend. Merrill Lynch has set a $44 price target on the stock, while the consensus is at $38.74. Oracle closed Thursday at $38.15.
VMware Inc. (NYSE: VMW) has been on fire and is a leader in cloud storage software. Its cloud computing service is a new offering for its customers. The company’s vCloud Hybrid Service has not been designed or marketed as a standalone public cloud as of yet. Many analysts believe that on a pricing basis, it is one of the more expensive offerings. The ability to tie its software solutions in with public cloud service may be a huge winner in the future. The Merrill Lynch price target for the stock is $106. The consensus price target for the stock is $102.35. VMware closed Thursday at $97.70. Investors can also indirectly own VMware by buying the stock of storage giant EMC Corp. (NYSE: EMC). The company owns more than 43 million shares of the stock. EMC closed Thursday at $26.22.
The Merrill Lynch team is sticking with industry leaders and innovators for 2014. That makes good sense for investors nervous about a serious 2014 market correction. If economists from Wall Street are correct, we should see solid but not an overheated economy. As budgets at major corporations are loosened, many of these top stocks to buy may see good revenue growth.