The server and enterprise software team at BofA Securities on Thursday released a 111-page report covering 14 companies in detail, including six companies for which the analysts are resuming coverage. Of the six, five are resumed with a Buy rating, and one gets a Neutral rating.
In the report, the analysts introduce a new framework for evaluating software companies they call the 4M Framework: Market opportunity, Moat, Margin and Management. The market opportunity (total available market, or TAM) for software is forecast to rise from an estimated $957 billion in 2020 to $1.51 trillion by 2025.
In addition to the six stocks reinstated to BoA’s coverage, the analysts also cover eight others. Here they are along with their rating and price objective: Coupa (Buy, $400); Microsoft (Buy, $280); Oracle (Neutral, $74); Salesforce.com (Buy, $275); ServiceNow (Buy, $650); Shopify (Underperform, $1,100); Veeva (Buy, $340); and Workday (Buy, $300). Coupa, Salesforce, ServiceNow and Workday are top picks among this group.
Here are highlights on the six stocks on which BofA Securities has reinstated coverage, based on the analysts’ metrics for market size, moats and margins. The first two companies listed here are also among the analysts’ top picks.
HubSpot
Cloud-based customer relationship management firm HubSpot Inc. (NYSE: HUBS) is another BofA Securities top pick for its “sustained 25%+ long term growth led by consolidation of vast small/medium biz front office applications market with leading cloud platform.” The analysts see a TAM of more than $41 billion in HubSpot’s marketing, sales, service and customer management businesses. The company’s moat comprises its 103,000 strong customer base, robust partner network and the breadth and depth of its product suite.
The analysts believe that HubSpot has a “long runway for 25%+ growth” and writes approvingly of the company’s framework for trading revenue growth for margin expansion by reducing HubSpot’s dependence on its sales and marketing product’s 45% share of total revenues to 30% to 35% over the long term.
HubSpot’s stock traded up about 5% Thursday, at $508.98 in a 52-week range of $133.23 to $547.47. The stock’s consensus 12-month price target is $566.19. BofA Securities rates the stock a Buy with a price objective of $600, which pencils out to a potential upside of 17.8%.
Splunk
Splunk Inc. (NASDAQ: SPLK), another of BofA Securities’ top picks, offers a platform for real-time data collection, reporting and management, along with cybersecurity solutions. The analysts view the company as a top pick due to its “large market opportunity (est. $57bn TAM and only 4% penetrated) — leveraging core log mining installed base and sales channel to growing observability market.”
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