Stifel Says 3 Red-Hot Software Stocks Are Serious Takeover Candidates

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The software industry has been on a wild ride this year, and it’s safe to stay that some of the newfound volatility is here to stay. With that in mind, after strong returns in 2017 and so far this year, it’s a very good bet that mergers and acquisitions within the sector will continue. It is also a good bet that private equity companies will be the ones doing the acquiring, as they have amassed a giant war chest of cash to go shopping with.

In a new SunTrust Robinson Humphrey research report, software analyst Terry Tillman notes that some 20% of private equity deals in 2017 were in the technology arena. He also cited some pretty incredible data in his work.

According to PitchBook data, there is well in excess of $1 trillion in committed capital associated with private equity and venture capital funds globally. The vast majority is associated with private equity firms that have become voracious acquirers of software companies.

Tillman also noted that specific big players are accumulating the capital for deals:

We are referring to Silver Lake, Vista Equity Partners and Thoma Bravo which were reported by PitchBook to have raised $33.6 billion in new capital over the past 18 months alone. These firms, along with the broader private equity community and strategic acquirers with additional dry powder from large offshore cash repatriations, are likely to drive a greater volume of transactions and potentially drive higher takeout multiples in our opinion.

Three companies, all rated Buy, are considered good targets, and a fourth, Salesforce.com, just made a big deal to expand its total addressable market.

Coupa Software

This is recognized as a 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. The platform offers consumerized financial applications.

The Coupa Software platform offers consumerized financial applications. Its spend management suite includes procurement, invoicing, expenses, sourcing, inventory, contract lifecycle management, budgeting, analytics, open business network, supplier information management and storefront.

The platform offers features, such as procure-to-pay solution; online invoice management, and inventory management and tracking software system. Its solutions for business needs include financial compliance and mobile productivity. The company’s solutions for enterprise resource planning include Oracle and NetSuite. Coupa offers solutions for industries, including financial, health care, oil and gas, retail, technology, and food and beverage.

The analyst noted this:

We see considerable upside potential to billings over the next two years, which ultimately could mean our calendar estimates could be meaningfully too low on revenue as well. Two high growth M&A precedents in the spend management space are Ariba and Concur, which were acquired by SAP for ~10x EV/forward sales and ~8x, respectively. We think a premium to those multiples is reasonable due to Coupa’s much higher growth profile and the company remaining in the earlier innings of share of wallet gains in spend management.

The SunTrust price target for the shares is $56. The Wall Street consensus target is $51.70. Shares closed on Monday at $44.81.

Okta

While probably not a household name, this company could be a target of private equity. Okta Inc. (NASDAQ: OKTA) is an independent provider of identity for the enterprise. Its Okta Identity Cloud platform provides identity management solutions that enable customers to secure their users and connect them to technology and applications. It also connects enterprises to their customers, employees, contractors and partners.

The products allow users to access a range of cloud applications, websites, mobile applications and service from various devices. Its platform is used by information technology (IT) organizations to secure their enterprise and by developers to build customer-facing websites and applications.

Okta Identity Cloud consists of a suite of products to manage and secure identities. It offers a range of products, such as Adaptive Multi-Factor Authentication, Universal Directory, Lifecycle Management products, Single Sign-On, application program interface Access Management and Mobility Management.

The analyst feels it would be a solid addition as a takeover candidate and the report noted this:

Given the strong performance in billings the past several quarters, we believe our revenue estimate could prove conservative. Our price target is based on applying a 10x EV/CY 2019 calculated billings multiple. High growth, sub-scale software stories serving large open-ended TAMs have commonly traded at 8x-10x forward sales/billings.

SunTrust has a $45 price target, and the consensus target is $42.43. Shares closed on Monday at $38.66.