The past year was an incredible one for tech stocks, and so far in 2020 it seems that this rally will continue. A recent Credit Suisse report predicts that software specifically will benefit from many of the secular trends that have been at the forefront for the past several years, including a healthy demand environment. Ultimately, the firm expects that digital transformation investments will drive fundamental performance, and it anticipates software stock performance will continue to outperform.
In the report, Credit Suisse noted that software is continuing to outperform based more on fundamentals versus multiple expansion, considering secular growth drivers. Valuation and multiple bifurcation causes a need to be more selective than in prior years, especially in infrastructure and security
Large and mega-cap software-as-a-service (SaaS) companies continue to outperform, driven by increasing share of budgets and benefitting from vendor consolidation and balance sheet capacity to acquire disruptors. However, investors may begin to question long-term margins, given continued dilution from M&A
Considering these trends, Credit Suisse had a few of its top software picks for 2020.
Microsoft Corp. (NASDAQ: MSFT) was reiterated with an Outperform rating and the price target was raised to $180 from $155. Credit Suisse remains constructive on the long-term opportunity for Microsoft. Its CIO Survey suggests positive momentum:
Our survey of 80 CIOs suggests Microsoft continues to see significant wallet share expansion at enterprises, with Azure the preferred cloud for 76% of respondents. Our survey also indicates share gains for Azure (66% respondents), with Microsoft still leading rivals in hybrid cloud solutions (69% of respondents chose Azure Stack vs 35% / 23% for AWS Outposts / GKE) The tail of Windows 10 refresh is also likely longer than expected, as 48% of respondents indicate they have yet to complete migration to Windows 10. Office 365 E3 remains the most predominant SKU (55%), with ARPU uplift opportunity from E5.
Credit Suisse also sees Microsoft’s Commercial Cloud exceeding $100 billion. The firm believes if Azure consumption services reaches the same scale as AWS currently (approximately $36 billion) and Office 365 Commercial penetration rate approaches 90% in five years, the Commercial Cloud business could exceed $100 billion in revenues.
Salesforce.com (NYSE: CRM) was reiterated with an Outperform rating and the price target was raised to $215 from $185. Credit Suisse believes that Salesforce will outperform in 2020, driven by its leadership in enabling digital transformations and ability to execute against this secular trend.
Shopify Inc. (NYSE: SHOP) had a very strong 2019 with performance of 187%, versus the IGV software index performance of 34%. The firm anticipates Shopify will continue to execute against its secular growth opportunities in 2020. Credit Suisse reiterated an Outperform rating and raised its price target from $370 to $450.
Splunk Inc. (NASDAQ: SPLK) was reiterated with an Outperform rating and its price target was raised to $170 from $150. In 2019 Splunk outperformed the IGV, posting gains of 45%. Credit Suisse sees pricing changes alleviating major barriers to incremental adoption. The firm also sees room for continued multiple expansion as Splunk’s model begins to normalize.
Adobe Inc. (NASDAQ: ADBE) was reiterated with an Outperform rating and the price target was raised to $385 from $350. Last year was a strong one for Adobe, posting gains of 46%. Credit Suisse anticipates Adobe will show resilience in Digital Media growth and operating margins, as well as improve its Digital Experience operations in 2020.
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