According to data from Fidelity, software companies have added about 44.2% to their share price this year, about 20 points better than the tech sector as a whole and second only to the energy sector’s 35% year-to-date gain.
But J.P. Morgan software analyst Sterling Auty sees some headwinds forming. Among those headwinds are potential interest rate hikes, inflation and more moderate growth rates. Noting that “software has already given up two multiple turns on valuation over the course of 2021,” Auty wonders “how much further does this compression have to go and over what timeframe?”
He notes that the market still appears to be focused on growth, and his top picks for next year are those stocks that offer accelerated growth rates. Here’s a look at three stocks Auty just raised from Neutral to Overweight for 2022.
Avalara Inc. (NYSE: AVLR) provides cloud-based solutions for transaction tax compliance to businesses around the world. The 12-month price target was left unchanged at $190. J.P. Morgan believes Avalara will show consistent growth in 2022 due to expanded offerings in several of its primary markets. The U.S. Supreme Court ruling requiring e-commerce retailers to collect sales tax is an additional tailwind. At a price of around $140.70 per share, the upside potential to Auty’s price target is 35%.
CrowdStrike Holdings Inc. (NASDAQ: CRWD) “has emerged as the leader in the next generation of endpoint security space,” according to Auty, and it has begun to establish a presence in the cloud security space as well, significantly enlarging its total available market. The analyst left his 12-month price target at $255. At a share price of around $195, the upside potential to Auty’s price target is almost 31%.
SS&C Technologies Holdings Inc. (NASDAQ: SSNC) provides a full stack of software for the financial services and health care industries. Along with a ratings upgrade from Neutral to Overweight, J.P. Morgan raised its 12-month price target on the stock from $86 to $95, crediting SS&C’s “aggressive M&A strategy.” Auty noted that the company’s share would benefit from “early synergy capture” if SS&C could make another significant acquisition. At a share price of around $78.20, the upside potential to Auty’s price target is about 21.5%.
While these three were the ratings-change winners in J.P. Morgan’s new review, some 13 stocks were downgraded, including five that were dropped from Neutral to Underweight.
Akamai Technology Inc. (NASDAQ: AKAM), the leading internet content delivery network, has been posting growth in its cybersecurity business, but the rest of the company’s business, accounting for more than 60% of revenue, is flat at best, according to Auty. At a share price of around $113.30, the upside to J.P. Morgan’s price target of $120 is about 5.6%.
Cloudflare Inc. (NYSE: NET) gets Auty’s nod as, perhaps, “the largest revenue generator in our coverage 10-15 years from now as it increasingly capitalizes on companies moving edge technologies like cyber security, networking, traffic routing and even compute into the cloud.” Just not soon. The downgrade was accompanied by a price target cut from $212 to $144. At a share price of around $131.80, the upside potential to the new price target is 9.3%.
Datadog Inc. (NASDAQ: DDOG) also got a price target cut along with the lowered rating. The firm cut the price target from $212 to $195. This is “purely a valuation call,” according to Auty, who thinks sales capacity is a growth constraint and that Datadog’s scale “will become increasingly challenging.” At a price of around $157.90 a share, the upside potential to the new price target is 23.5%.
Sapiens International Corp. N.V. (NASDAQ: SPNS) did not suffer a cut to its existing $35 12-month price target, but at a trading price of around $34, the upside potential is just 2.9%.
Zscaler Inc. (NASDAQ: ZS) got a price target cut from $362 to $320 to accompany its downgrade. This is another of Auty’s pure valuation views. At a share price of about $279, the upside potential to J.P. Morgan’s 12-month price target is 14.7%.
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