The entire technology sector has been on an insane run over the past year, and there is no question that many of the top companies are now trading with very stretched valuations. The good news for investors is that not all the top companies in the sector, especially in the software arena, are grossly overbought.
A new Jefferies research report highlights the firm’s top software picks for 2020. While they have selections in all market capitalization levels, here we focus on the large-cap selections, as they often can provide a degree of stability due to size and liquidity. These four are rated Buy and look like solid picks for 2020 and beyond.
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Adobe Systems
Shares of this high-profile old-school software company have backed up in price and are offering the best entry point in quite some time. Adobe Systems Inc. (NASDAQ: ADBE) operates in three segments: Digital Media, Digital Marketing and Print and Publishing. 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.
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 analysts anticipate that earnings may increase a solid 30% or more in the coming year.
The company recently hosted its MAX analyst day. The fiscal year 2020 revenue guide implies about 18% growth, in-line with Wall Street estimates. In addition, while Adobe typically reiterates the fiscal fourth-quarter guidance, it surprised to the upside and raised Digital Media net new annual recurring revenue by $25 million to $475 million.
The Jefferies analysts noted that fiscal year 2020 will market the fourth consecutive year of 60%+ revenue growth and operating margin for the company. That kind of strong operating results that can very possibly push the shares higher.
The Jefferies price target for the shares is $390, and the Wall Street consensus target was last seen at $345.58. The stock closed Monday’s trading at $345.83 a share.
Intuit
This company 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. The Jefferies team remains very positive on the shares and noted that they think Intuit’s revenue growth will exceed the firm’s 10% or so guidance.
Intuit offers investors just a 0.77% dividend. Jefferies has a $320 price target, while the consensus price objective is lower at $280.56. The stock closed on Monday below those levels, at $276.04.
Microsoft
This top software and cloud technology stock continues posting new highs, and the company has a massive $133.8 billion sitting on the balance sheet. Microsoft Inc. (NASDAQ: MSFT) manufactures, licenses and supports a wide range of software products. It is also considered one of the best companies to work for.
The company has transformed its business model from a component-driven model (PC, server) to one driven by the need for cloud capacity. The cloud was big in the 2019 earnings reports and will remain a growing part of the software giant’s earnings profile.
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Many Wall Street analysts agree that Microsoft has become a clear number two in the public or hyper-scale cloud infrastructure market with Azure, which is the company’s cloud computing platform offerings, and which continues growing at triple-digit levels. Some have flagged Azure as the biggest rival to Amazon’s AWS service. Other analysts maintain that Microsoft is discounting Azure for large enterprises, such that Azure may be cheaper than AWS for larger users.
The Jefferies analysts note that the stock is expensive, but they do feel it can “grind” to their target price over the course of 2020.
Microsoft shareholders receive a 1.25% dividend. The $175 Jefferies price target compares with the $166.97 posted consensus price objective. The stock closed most recently at $163.28 per share.
Salesforce
This top company reported solid fiscal 2019 results as billings have drastically improved, and this past quarter was no exception. Salesforce.com Inc. (NYSE: CRM) provides enterprise cloud computing solutions, with a focus on customer relationship management to various businesses and industries worldwide. It also has one of the most valuable brands in the world.
It offers enterprise cloud computing applications and platform services, including Sales Cloud that enables companies to store data, monitor leads and progress, forecast opportunities, gain insights through relationship intelligence and collaborate around sales on desktop and mobile devices.
The company also provides Service Cloud, which enables companies to deliver personalized customer service and support, as well as connect their service agents with customers on various devices, and Marketing Cloud, which enables companies to plan, personalize and optimize customer interactions.
In addition, Salesforce announced last year it has completed its acquisition of Tableau Software, bringing together the world’s number one customer relationship management company with the world’s number one analytics platform.
Jefferies has set a strong $210 price target. The posted consensus target price is lower at $193.25, and the shares were last seen changing hands at $183.85 apiece.
Shares of these top companies have had substantial runs over the past couple of years. With fourth-quarter earnings about ready to hit the tape, it may make sense to buy partial positions here and see how the results come in. The good news for investors is that they are all leaders in their specific categories and should remain that way for years to come.
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