Despite numerous concerns about the software sector, not the least of which is a lingering strong dollar, these companies continue to plow ahead, delivering solid earnings and providing solid earnings revisions. Also, while some of the top companies continue to trade at valuations that are somewhat elevated, they still look to be poised for further growth.
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In a new Jefferies research report, chief equity strategist Sean Darby and his team make the case for four companies that technology investors looking to add software positions should surely consider now. Their report said this in discussing the overall software sector:
It would be unfair and perhaps an investor’s curse to claim that software expenditure was ‘recession proof’ but the fact that its major customers are financial services, government offices and businesses lends itself to relatively resilient demand and upgrades. It would take a fairly deep recession to disrupt all three at the same time. Interestingly, the strong US profit rebound and reasonable expansion in EU government budgets provides a source of expenditure in fiscal year 2019 despite the higher base from US earnings.
Four of the stocks covered are likely “must-own” buys for investors with strong risk tolerance.
Adobe Systems
This high-profile old-school software company and has posted outstanding earnings and will report again today after the close. Adobe Systems Inc. (NASDAQ: ADBE) operates in three segments. The Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote and monetize their digital content. The other segments are Digital Marketing and Print and Publishing.
Top Wall Street analysts see the company benefiting from artificial intelligence, predictive analytics, automation bots, speech recognition and natural language processing and image recognition. Some on Wall Street see earnings per share increasing a solid 30% or more this year.
The Jefferies team feels the company deserves a premium multiple to its peers due to Adobe’s strong competitive position in the creative space and above-average growth prospects. The company posted solid results in December, but it still got caught up in the across-the-board fourth-quarter selling.
The Jefferies price target for the shares is $315, and the Wall Street consensus target is $289.79. The shares closed Wednesday’s trading at $264.38.
Intuit
This company has been on a roll this year and hits all the metrics in the technology sector for accounting needs. Intuit Inc. (NASDAQ: INTU) is a provider of business and financial management solutions for small and medium-sized businesses, financial institutions, consumers and accounting professionals.
Products and services include TurboTax, QuickBooks, Quicken, small business financial management and payroll processing, personal finance and tax preparation and filing and online banking services through its Digital Insight acquisition. Intuit also offers products on a software as a service (SaaS) platform across all its business divisions.
Intuit has served small businesses and accountants with QuickBooks for more than 20 years. The company was an early innovator in cloud accounting when it first launched QuickBooks Online in 2001. QuickBooks Online has more than a million paying subscribers, cementing its market leadership as small businesses shift to the cloud.
Over 40% of small businesses are using either Quickbooks Online or Quickbooks Desktops, while 35% are using Excel or manual paper accounting. This highlights the underlying opportunity for the company going forward.
Intuit investors are paid a 0.75% dividend. Jefferies has a $290 price target, while the consensus price objective is $289.79. The stock closed at $253.65 a share on Wednesday.
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