A Rebound Coming for Software Stocks? Jefferies Has Top Picks Now

Software stocks underperformed the S&P 500 in both 2021 and 2022. As a group, software stocks trailed the S&P 500 by 15% in 2021 and 16% in 2022. Valuations fell by 63% last year.

Getting back on a solid footing will take more time, according to the Jefferies 2023 Software Playbook. Analysts Brent Thill and Joseph Gallo, and their team, see a mixed-to-negative first half of 2023, with a better second half thanks to an expected return to growth in 2024 after estimates are lowered and multiples have been reset. In other words, adjusting to the new, new normal.

Before we look at the ratings changes the firm released Thursday morning, here is a rundown of Jefferies’ top predictions. Among large-cap stocks, Microsoft, Intuit and Oracle get the nod. Fortinet and Okta are the top choices among security companies, while Splunk, Procore and DocuSign are mid-cap picks. PowerSchool is the lone small-cap pick at Jefferies, and Atlassian, Snowflake, DataDog and Cloudflare are the firm’s high-growth choices.

Here are the four upgrades and four downgrades Jefferies announced Thursday morning.

Oracle Corp. (NYSE: ORCL) was raised from Hold to Buy, and the price target increased from $90 to $105. The implied 2024 price-to-earnings per share (EPS) multiple was raised from 16 times to 19 times. The analysts believe Oracle is well-positioned in a tough IT environment as companies spend more on back-office software, which may result in organic growth in cloud computing. If cloud sales fail to materialize, Oracle’s on-premise software will benefit. Jefferies calls Oracle “one of our favorite value names from a tactical perspective.”

At a share price of around $84.00, the upside potential based on the new price target is 25%. Oracle’s 52-week trading range is $60.78 to $89.52.

Atlassian Corp. (NASDAQ: TEAM) also was raised from Hold to Buy, and its $150 price target was left unchanged. The implied 2024 price-to-revenue multiple was raised from 8.8 to 8.9. One of Jefferies’ high-growth picks, the firm claims that Atlassian has the “best fundamental business” in its coverage. The decline in the revenue multiple from the mid-teens to high single digits creates a buying opportunity. The analysts also like the company’s prospects for medium-term growth, a large total available market and large customers still on deck to migrate to the cloud, among other things.

The implied upside to the stock is about 22%, based on a trading price of around $123.00. The stock’s 52-week range is $113.86 to $352.92.

Check Point Software Technologies Inc. (NASDAQ: CHKP) gets a rating upgrade from Hold to Buy as well and a price target hike from $135 to $150. The implied price-to-calendar year 2023 free cash flow multiple was raised from 11.6 to 13.2. Check Point’s challenge, Jefferies believes, is to “meaningfully re-accelerate” revenue growth. The company “has historically struggled to put up meaningful revenue growth and bears questions whether it can meaningfully accelerate growth in the face of macro weakness.”

At a share price of around $127, the implied upside based on Jefferies’ new price target is 18.1%. The stock’s 52-week range is $107.54 to $149.62.

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