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.”
Splunk’s moat consists of its large installed base of more than 22,000 customers, including 91 of the Fortune 100, a larger sales organization than any other development, security and operations (DevSecOps) competitor, and the breadth and depth of its Data-to-Everything Platform.
The company withdrew its fiscal year 2023 guidance for an operating margin of 20% on annual recurring revenue (ARR) last December and the shares dropped a quarter of their value. BofA Securities notes that the company retained its long-term guidance for ARR of 25% and “think[s] that this serves as an indicator for the margin profile post-model transition and as the macroeconomic backdrop stabilizes.”
Splunk’s stock traded up about 1.7% Thursday, at $141.25 in a 52-week range of $120.58 to $225.89. The consensus 12-month price target is $193.62. BofA Securities rates the stock a Buy, with a price objective of $180, which would be a potential upside of 27.4%.
DocuSign
DocuSign Inc. (NASDAQ: DOCU) is a cloud-based software company offering an e-signature solution that businesses large and small use to prepare, execute and act on agreements. BofA’s analysts see a “runway for 25%+ revenue growth exists in [the] large underpenetrated eSignature market (est. 8% in $21bn TAM). Emerging agreement cloud platform expands to natural adjacencies.” The TAM for the company’s product is 24%.
DocuSign’s moat is an installed base of more than 822,000 customers of all sizes, a distribution channel of more than 3,000 sales and marketing staff, and the breadth and depth of its product offerings.
The analysts calculate DocuSign’s lifetime value-to-customer acquisition cost ratio at 15.4 times, best in its class, and view that ratio as a “leading indicator for margin expansion.” In 2018, DocuSign set a long-term goal for operating margin of 20% to 25%, based on gross margin in a range of 78% to 82%.
DocuSign’s stock traded up about 2.4% Thursday to $210.58, in a 52-week range of $86.13 to $290.23. The consensus 12-month price target is $275.56. BofA Securities rates the stock a Buy and has a price objective of $250. That would be a potential upside of 18.5%.
Adobe
Adobe Systems Inc. (NASDAQ: ADBE) is nearly 35 years old and has been navigating a long period of transforming itself into a cloud-based company. According to the analysts, the company’s TAM exceeds $100 billion in revenues for digital content creation, services, eSignature and other businesses. As they note, Adobe has a “long runway for sustained mid teens growth led by demand for more digital content and market leading position.”
That market-leading position of some 21 million subscribers across enterprises of all sizes, its strong channel presence and the depth and breadth of its product offers comprise its formidable moat.
The analysts are modeling “a solid 2 yr FCF CAGR [free cash flow compound annual growth rate] of 15%, driven by sustained mid teens revenue growth and 30-90 basis points [of] annual margin expansion.” Adobe’s Digital Experience margin expansion is growing toward 75%. Margin expansion is due in part to rising revenues and lower expense growth.
Adobe’s stock traded up about 1.5% on Thursday to $501.02. The 52-week trading range is $301.79 to $536.88, and the consensus 12-month price target is $565.42. BofA Securities rates the stock a Buy, with a price objective of $570, which represents 13.8% potential upside.
Intuit
Intuit Inc. (NASDAQ: INTU) is only a few years younger than Adobe as a publicly traded company, and the BofA analysts like it for some of the same reasons they like Adobe. Overall, Intuit sports “sustainable double digit revenue growth from QuickBooks self-employed and advanced strength and DIY gains in the TurboTax consumer business.”
The TAM for those markets is more than $50 billion, and Intuit’s moat is based on its 38% global market share among small businesses with fewer than 20 employees and 63% of the do-it-yourself consumer market.
BofA Securities expects “solid long term margin expansion stemming from operational discipline and [artificial intelligence] AI efficiencies across platform.” Over the long term, the analysts expect 10 to 50 basis points of margin expansion, mainly from reduced expenses. For fiscal years 2021 and 2022, BofA expects operating margin of 33.8% (−90 bps) and 34.0% (+20 bps), respectively.
Intuit’s stock traded up about 2.3% Thursday, at $410.21 in a 52-week range of $244.56 to $423.74. The stock’s consensus 12-month price target is $447.54. The BofA Securities Buy rating comes with a price objective of $460, which suggests potential upside of 12.2%.
24/7 Wall St.VMware
VMware Inc. (NYSE: VMW) is the only stock that BofA’s analysts have restarted coverage on that does not have a Buy rating. The analysts point to “lackluster revenue growth impacted by pandemic headwinds and ongoing cloud transition, though limited downside with shares trading at 15x [calendar year 2022] C22 FCF.” The TAM for VMware is around $54.8 billion, which implies a 21.5% market share.
VMware’s moat is its installed base of more than 500,000 customers, including every one of the Fortune 100, 99% of the Fortune 1,000, 100% of the Fortune Global 100 and 97% of the Fortune Global 500. As of 2017, VMware had more than 80% of the global market share for virtual machine software.
BofA Securities is modeling operating margin of 28.2% for fiscal year 2022, down from an expected 32.1% margin in fiscal 2021, largely due to cloud transition costs and pandemic-related headwinds. Margins remain essentially flat in fiscal years 2023 and 2024 as revenues grow once the cloud expenses are reduced.
VMWare’s stock traded down about 1.2% Thursday to $151.74. The 52-week range is $121.78 to $161.95, and the consensus price target is $167.86. The Neutral-rated stock is accompanied by a price objective of $175. So the potential upside is 15.2%.
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