Cloud computing and software as a service stocks have been hit hard as investors fear higher interest rates, inflation and other headwinds will dampen tech spending in the new year , but some analysts see the pullback as a buying opportunity.
Software stocks took a hit with the onset of the new year, analysts at JP Morgan among those strongly suggesting that the large gains in recent years have led stocks to reach appropriate valuations relative to expected growth in a close future. Both the first ETF Trust Cloud Computing SKYY,
– which tracks Software-as-a-Service, or SaaS actions, – and the IGV iShares Expanded Tech-Software Sector ETF,
are down about 10% in the past three months and now show only small single-digit percentage gains over the past 12 months.
Learn more: Salesforce and Adobe Lead Software Sales Amid Concerning Growth
In comparison, the S&P 500 SPX index,
is up 6% in the past three months, while the Nasdaq COMP Composite Index,
is up 2%, and over the past 12 months the S&P 500 is up 23% and the Nasdaq is up 14%.
Other analysts have followed the declines by offering their silver liners in the decline of the cloud – software stocks to be targeted by investors. Jefferies analyst Brent Thill said in a recent note that while valuations are tight in the software sector, the fundamentals are “still alive.” While the IGV only gained 12% from the 27% rise of the S&P 500 in 2021, this follows the 52% rise of the software ETF in 2020 compared to the 16% gain of the S&P 500 in 2021. S&P 500.
“The multiples will continue to compress in 22 as digital digestion occurs after the pandemic and 80% of software names are expected to decelerate (up from 43% in 2021 and 66% in 2020),” Thill said. “We expect the IGV to outperform the S&P 500 in 22 on strong fundamentals after underperforming in 21.”
Top Jefferies picks include Microsoft Corp. MSFT,
Adobe Inc. ADBE,
CRM Salesforce.com Inc.,
Inuit inc. INTU,
Palo Alto Networks Inc. PANW,
CrowdStrike Holdings Inc. CRWD,
and SailPoint Technologies Holdings Inc. SAIL,
RBC Capital Markets, in a note edited by analyst Matthew Hedberg, said it doesn’t expect the trend of more experiences becoming “digitally connected” to slow.
“Our fundamental thesis remains unchanged that 2020/21 has radically changed the tech landscape in a way that will largely shape the next decade of tech trends and push every organization ‘faster into the future’,” according to RBC.
“While COVID /[work-from-home] tailwinds are starting to fade and the industry faces more difficult compositions, we look at the sustainability of the software trends that will persist over the next year (and decade) with a focus on the cloud, the hybrid work, automation, AI and security transformations, ”Hedberg mentioned.
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This sustainability trumps the ‘November / December sale as Omicron COVID variant fears, COVID / WFH tailwinds slowing, interest rate fears, tough comps, sector rotations, currency headwinds, pressure on margins (due to labor shortages and some cost savings associated with COVID). fade) and global valuation fears weigh on the sector, according to RBC.
RBC has stocks such as Palo Alto Networks, CrowdStrike, ServiceNow Inc. NOW,
Twilio Inc. TWLO,
Veeva Systems Inc. VEEV,
and Coursera Inc. COUR,
among his top picks for 2022.
Mizuho analyst Siti Panigrahi said it was no surprise that SaaS stocks have “languished” due to expected interest rate hikes, providing an ideal buying opportunity.
“We believe this underperformance makes promising SaaS stocks more attractive after the group’s valuation fell below its two-year moving average support level, a dynamic not seen since March 2020 after the initial shock from COVID- 19 “, said Panigrahi.
Top choices at Mizuho include Palo Alto Networks, Atlassian Corp. TEAM,
Intuit, Twilio and Autodesk Inc. ADSK,
Not so fast, “meager” earnings are a problem
UBS analyst Karl Keirstead, however, takes a more cautious view of the industry, given what he called a “third quarter lean beating pattern” in earnings reports, and therefore downgraded Salesforce and Adobe to keep their notes.
Keirstead said he spoke to more than 25 IT executives at large companies about their spending outlook for 2022 and came away with concerns that “front office spending growth may moderate in 2022.”
While Keirstead said much of the selling could be linked to inflation and the prospect of higher interest rates, “we’re much more interested in risk than a slower pace of corporate spending. companies – the main fundamental risk – could at least partly explain the lack of focus on results across the software industry over the past few months and that this risk continues to weigh on the industry in 4Q21 and potentially for at least several additional quarters.
Based on his interviews with IT officials, Keirstead said beneficiaries in 2022 appeared to include companies such as Microsoft, Amazon.com Inc’s AMZN,
AWS Public Cloud Service, MongoDB Inc. MDB,
and Snowflake Inc. NEIGE,
Of the stocks covered in this report, Microsoft, Intuit, and Palo Alto Networks have all gained more than 40% in the past 12 months, while stocks from Twilio, Veeva, CrowdStrike, SailPoint and Autodesk have lagged behind. 15% or more.