It doesn’t take an investing wizard to know that valuations across the market, especially in the technology sector, are very elevated. With these conditions, the last thing anybody wants to hear is “it’s different this time” because that statement is usually the kiss of death.
With that in mind, however, many of the top analysts on Wall Street have been around and they witnessed the tech crash in 2000 and the real estate driven meltdown in 2008. So needless to say, caution is inherent when looking forward.
In a new Jefferies research report on the software sector, the analysts concede valuations are stretched but acknowledge that some factors, not the least of which is the drop in the corporate tax rate, are helping valuations. They also feel that many top software companies are growing faster than the economy and said this in the report:
Many names are growing and will grow at much greater rates than the long-term growth rate of the economy in the near term anyway. Given the high visibility due to the recurring nature of these models, we have relatively high confidence in the recurring revenue one, two, and sometimes even three years into the future. Therefore, it might be reasonable to apply the above multiples to these estimates. As a result, current valuations do not seem unreasonable.
That said, they are not wildly bullish but are maintaining a measured view of the sector, and they also noted this:
We have been more positive on the business of Software over the last few years than we have for almost two decades covering the sector. Being very positive on Software stocks over most of that three years was pretty easy. Our view of the business of Software hasn’t changed. Regarding the stocks, it’s just not as easy as it was.
We screened the Jefferies software research universe looking for stocks rated Buy that offer solid value at current trading levels. These four look like good picks for aggressive growth accounts.
This was a hot initial public offering earlier this year, but it has come back to earth and could be offering investors a great entry point. Dropbox Inc. (NYSE: DBX) provides a cloud-based file-sharing and collaboration platform, and it has over 500 million registered users across 180 countries. The company generates revenue by selling cloud file storage and collaboration tools for subscription fees.
It is estimated that Dropbox has 11 million paid subscribers, of which 70% are on individual plans and 30% on team plans. Core markets include public cloud storage and collaboration software, with longer-term opportunities in content management and project and portfolio management.
The stock has posted solid quarterly numbers this year, and the lockup period after the IPO expired in August, so there is a solid chance that many that were looking to monetize have done so.
The Jefferies price target for the stock is $37, and the consensus target across Wall Street is $35.23. The stock traded on Tuesday morning at $26.85.
This top software stock has had a very difficult year but offers a very good entry point. Oracle Corp. (NYSE: ORCL) develops, manufactures, markets, sells, hosts and supports database and middleware software, application software, cloud infrastructure, hardware systems and related services worldwide.