With a wild first quarter finally over, it is very interesting to note that the Dow Jones industrial average beat the Nasdaq Composite Index in the first quarter by the biggest margin in about 15 years. Many investors with exposure to the Nasdaq may have noticed that in the rotation to cyclical and value names, many of the top technology stocks were hit hard, especially some of the leading software companies.
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Despite the sell-off, many top software stocks are still trading with valuations above their pre-pandemic peaks. In a new Goldman Sachs research report, Kash Rangan and the superb software team make the case that some stocks are trading with reasonable valuation. The report said this:
In our view, it is helpful to provide historical context as to the magnitude and timing of the current correction relative to prior downturn; however, we also note that despite the recent pullback valuations remain above their pre-COVID peak. On average, we note that calendar year 2021 consensus sales forecasts are roughly in line with pre-COVID estimates, while valuations have generally expanded. That said, within our broader software coverage, we highlight names where valuations have not re-rated meaningfully higher and the outlook for growth driven by accelerated digital transformation efforts is attractive.
We screened the list of stocks that the analysts like now that are trading at what the analysts feel are comparable to more attractive valuations than their pre-pandemic peaks despite the 10-year Treasury yield currently trading 20 basis points higher. We found five that make sense for aggressive growth investors looking to add software exposure to portfolios. Three of them recently were added to the Goldman Sachs Conviction list of top stock picks. It is still important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Adobe
Shares of this high-profile legacy software company have really backed up some in price and are offering investors a solid entry point. Adobe Systems Inc. (NASDAQ: ADBE) operates in three segments: Digital Media, Digital Marketing and Print and Publishing. The Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote and monetize their digital content.
Top Wall Street analysts see the company benefiting from artificial intelligence, predictive analytics, automation bots, speech recognition and natural language processing and image recognition. Flagship products include Creative Suite, Photoshop, Acrobat, Premiere, Dreamweaver, Illustrator, InDesign and LiveCycle. PDF and flash technologies from the company have become industry standards and act as a platform for other Adobe products.
The Goldman Sachs price target for the shares is $580, while the Wall Street consensus target is $565.85. Adobe Systems stock closed on Wednesday at $475.37 a share.
Coupa Software
This is a recognized leader in what is called sourcing applications. Coupa Software Inc. (NASDAQ: COUP) provides a unified, cloud-based spend management platform that connects organizations with suppliers globally. The company offers spend management cloud applications that are pre-integrated.
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