Salesforce ‘in the penalty box,’ while Workday sidestepping headwinds, analyst says of cloud software space
Cloud software is facing a rough and uncertain time as corporate budgets loom for a feared recession, but one analyst said risk is not even among players in the sector and investors need to be “highly selective” in their choices .
In a Thursday note, Bernstein analyst Mark Moerdler said some cloud software companies such as Workday Inc. WDAY,
show almost no signs of winds, while companies such as Microsoft Corp. MSFT,
Atlassian Corp. TEAM,
and Splunk Inc. SPLK,
“feel the pain”.
Salesforce Inc. CRM,
is “in the penalty box,” the analyst said. “While the price point may be attractive to some, the risks of the wheels falling off the name are real.”
“With many companies still not targeting for next year and IT budgets not being fixed, there is downside risk for those companies with 1) greater exposure to consumers and [small- to medium-business]; 2) hosting non-critical workloads; 3) where the [return on investment] of the installation of the solution is not relatively fast; and 4) the difference from competing solutions plus the cost of switching is not a big enough barrier for IT to switch to save money,” said Moerdler.
Given how the past earnings season played out, Moerdler provided his foundation in the cloud software sector.
The analyst said he would call Oracle Corp. ORCL buy,
and SAP SE SAP,
“for the risk reward with a near term preference for Oracle.”
ServiceNow Inc. NOW,
and Atlassian also gets a buy from Moerdler “after setting updated guidance and expectations for less downside risk in the recession.” Other acquisitions include Workday “because they are growing and delivering value when many of their peers are slowing, and Microsoft “so much of the downside is reduced and the company will accelerate growth at large margins as we emerge from the recession.”
Moerdler said Adobe Inc. ADBE,
which reported late Thursday “has become a show-me story” and its inline outlook “shows the resilience of the business, even considering their small to medium business and consumer exposure.”
“Mid-teens growth is sustained and margins are strong and likely to improve, and you get the option when the Figma deal closes (or proceeds from cash and other smaller acquisitions if it doesn’t),” the analyst said.
Read: Cloud software is a ‘knife-in-the-mud fight’ and Wall Street sours on the one sector that won
Meanwhile, Moerdler called Datadog DDOG,
“an exciting better than recommendation,” while Snowflake Inc. says SNOW,
“Growth is expected to slow more than expected.”
VMware Inc. s VMW,
acquisition by Broadcom Inc. AUGO,
“must close, but with several recent senior leadership departures, the downside has increased if the deal is blocked (which we believe will not happen),” Moerdler said.
Okta OKTA,
and Twilio TWLO,
“Both face bigger headwinds than others in our SMID Cap coverage as they work through operational challenges and uncertainty, along with thin margins, but have also seen share prices fall enough to keep them in a ‘wait and see’ mode , ” remarked Moerdler .
Year to date, the ETFMG Prime Cyber Security ETF HACK,
fell 27%, and the First Trust Nasdaq Cybersecurity ETF CIBR,
is 26% lower. The iShares Expanded Tech-Software Sector ETF IGV,
is down 35% for the year, while the Global X Cloud Computing ETF CLOU,
fell 39%, the First Trust Cloud Computing ETF SKYY,
fell 43% and the WisdomTree Cloud Computing Fund WCLD,
dropped 50%. Meanwhile, the S&P 500 SPX,
is down 20% and the Nasdaq Composite Index COMP,
is down 32%.
